To flatlanders, climbing a mountain may seem like a straightforward task. After all, from down below and at a distance, the summit can be seen clearly, even obviously. But experienced mountaineers know they face a different perspective when they hit the trail toward the top.Specifically, as climbing angles steepen, the summit in their view - seemingly so easily conquerable - is nothing more than a "false summit." False summits are intervening ridges or other terrain features that are positioned between the climber and the real pinnacle in such a way that the latter is obscured.

Many have struggled to clamber what they think are the last few feet, only to come face to face with the reality that they have not reached the summit at all. Some turn back, having expended their energy, muttering something about at least getting that far, while the hardy and the committed regroup and press on to the top.

The conceptual framework

We have constructed this mental image as a metaphor that describes the joint effort of the Financial Accounting Standards Board and the International Accounting Standards Board to revise, refresh and otherwise renew their separate conceptual frameworks into one jointly issued document that purportedly will guide them in evaluating existing financial reporting practices and in creating new ones through new standards.

Regardless of how it's looked at, this project is pivotal to the future of public financial reporting in the United States and the global economy. As we have said elsewhere, it represents a once-in-a-generation opportunity to not only set the direction for the future, but to also repair the damage that has been done in the past with politically compromised standards that do not deliver the needed information.

FASB's original framework was put in place in the 1970s and 1980s by the senior leaders of that generation. Now, a quarter-century later, the current senior generation faces the responsibility of leaving a stronger and more helpful legacy than its predecessors. Importantly, if our generation fails, the global economy could be saddled with the same sort of incomplete, misleading and even false financial statements and reports that are published today.

Just to be clear - a conceptual framework doesn't alter generally accepted accounting principles directly; however, a framework can make it more difficult to rationalize living with old bad standards or creating new ones. That's what makes this effort so important for the future.

What's happening now?

The current project is, well, huge. It involves staff teams on both sides of the Atlantic, and several of the senior staff were involved with the original endeavor of so long ago. As a result, the group has the advantage of knowing the route to the top on which the old FASB stumbled and stopped at the false summit expressed in SFAC 5 on Recognition and Measurement.

So that everyone can understand, the old project had built up a good head of steam as a unanimous consensus had been found in three areas: that financial reporting should provide useful information, that information is useful when it is relevant and reliable, and that useful information is about assets and liabilities.

The expedition faltered and then ground to a halt when it encountered the pivotal issue of whether useful information is based on original costs or current market values.

The impasse was so strong that essentially all forward progress was lost and SFAC 5 was issued, proclaiming that lots of different kinds of measures are used in practice and probably will continue to be used for a long time.

To continue the metaphor, FASB could do nothing more than scramble to the top of a false summit and then retreat, taking satisfaction only in having gotten that far and pretending that it was not a problem that it could go no further.

Now, today's project teams are well aware of the false trail the old board followed. There can be no doubt on this point. Yet it appears from the preliminary views document published by both boards in July that the project could be headed up the same path. Surely, some definite improvements are in the offing, but we are cringing at things we see. Other columns will comment on other points later, but this one examines the objective of financial reporting.

The objective

The new document proposes pretty much the same objective as the old: "to provide information that is useful to present and potential investors and creditors and others in making investment, credit and similar resource allocation decisions." While this external-user-driven focus is great, we think it is headed toward a false summit, perhaps even the same false summit that stopped the last project cold.

What we propose is that the boards aim much higher, and assert that the objective of financial reporting is to contribute to the wellbeing of society by helping make economies more efficient and effective in generating and distributing wealth. We would then go on to explain that the means of rendering this assistance is providing information to capital market participants so they can make good decisions about allocating capital at the right price for the underlying risks and uncertainties. Then we would explain that this task is served by providing useful information, just as the boards have proposed.


There are substantial advantages of aiming at this higher level. We'll focus on the big one, which is that this perspective should provide the board with substantially more clout for imposing unpopular new standards that bring about real improvement.

In effect, this macroeconomic perspective frames the issue as the question of whether the new information will make the capital markets more efficient, not whether it will benefit users. Importantly, it would allow the boards to avoid managers' obsessions with the cost of complying, because society's benefits will greatly exceed that piddling amount. For decades, we have seen virtually all issues at FASB bog down on this obsession, without any attention paid to the huge costs for the economy created by inefficient capital allocations.

Indeed, we see these higher objectives as empowering the board(s) to create standards that managers, auditors and users don't like. The surprise might be that users wouldn't necessarily be in favor of the new information. Here is what we're thinking: If sophisticated users have access to information or processes that allow them to figure out what no one else knows, then they can trade on that advantage to earn abnormal returns created by the inefficiency. But if the standard-setting goal is driving out inefficiency, then it makes sense to force that information out into the markets for the good of society at large.

Among other things, this perspective will downgrade the significance of complaints from preparers about the costs incurred in providing additional information, or in disclosing information that will place them at a competitive disadvantage. With a mandate for looking after society's interests, the boards' right response to this whining is to make managers provide useful information for everyone's good.

Standards are minimums

Further, we think that adopting this paradigm will eventually cause managers to come to grips with an undeniable truth: There is no real or lasting advantage from inferior reporting that doesn't clearly reveal truth about their situations and potential future cash flows. The consequence of bad accounting is inefficient pricing, and the direction of that pricing is downward because of the greater risk produced by uncertainty.

Standards are designed to ensure that minimally useful information is available to the market. What a mistake it is for anyone, including standard-setters and regulators, to believe that minimum compliance produces maximum information.

There is much room for improvement in both the conceptual framework and financial accounting practice. We think this higher view of serving society at large will keep anyone from pressing toward a false summit that falls way short of that goal. And we think that the two boards can greatly improve the likelihood for success by adopting a higher conceptual objective.

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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