by Paul B.W. Miller and Paul R. Bahnson

Over the three preceding columns, we have presented the case for the usefulness of reporting current market values for assets and liabilities.

Our presentations relied first on the Financial Accounting Standards Board’s Conceptual Framework to establish that the objective of financial reporting is to provide information that is useful for investors and creditors. We also explained that useful information must have both relevance and reliability — one without the other doesn’t cut it.

We went on to make a point that relevant information with insufficient reliability can be made more reliable with more effort, but that nothing can be done to make irrelevant information useful, no matter how reliable it is. Another key to our argument is that market values are reliable because they are based on observations of numerous transactions that have actually happened. They are also timely because they represent recent consensus assessments of the cash flow potential.

The third column showed that sophisticated users are highly interested in having ready access to market value-based information.

In the traditional financial reporting literature, the next step would be an impassioned plea for FASB, the Securities and Exchange Commission and the International Accounting Standards Board to immediately make market value reporting mandatory for all companies.

Well, we aren’t going there, so relax and sit back. In fact, we think it would be sort of strange to force people to do what they would sooner or later figure out is actually quite good for them to do.

The problem with the traditional approach is that the pivotal issue is always framed as: Should public financial statements be based on historical costs or current values? When we worked at FASB, both of us were immersed in the political struggle over that framing, and we know it simply isn’t productive.

For an analogy, imagine that cooks in a restaurant are arguing over what to put on the menu. Some want to sell only plain hamburgers, while others want to sell only cheeseburgers. They make logical and emotional arguments and finally vote that only hamburgers will be offered because they don’t want to go to the trouble of buying cheese, preparing it, and then putting it on the patties. Ridiculous, right? The solution, of course, is to serve both kinds of burgers so that all customers can have what they want, not merely what the cooks find convenient.

We think that any current effort aimed at replacing historical costs with market values will fail for two reasons. The first is the stubborn insistence by many, if not most, accountants that nothing is seriously wrong with generally accepted accounting principles. The second is the political clout possessed by those same people.

As we see it, there is no good reason to waste effort trying to use logical arguments and persuasive facts to overcome this stubbornly irrational but powerful political resistance. It just won’t work.

Change of that scope isn’t likely to happen without raising  a new generation that thinks differently. (Of course, at the rate the accounting and managerial professions are losing their leaders, that new generation may be just a few years away.)

Instead, we prefer this framing of the issue: Can market value information be usefully reported? Importantly, we are leaving its resolution up to individual managers, their accountants and their auditors, instead of demanding that an authoritative body resolve it for everyone.

Of course, GAAP already requires the supplemental disclosure of market values for a variety of assets, including pension assets, financial instruments and derivatives. In other places, market values are incorporated into the statements. Furthermore, SFAS 89 strongly recommends that managers disclose market values. Therefore, we’re not talking about a huge leap or a departure from GAAP. In fact, we’re merely advocating that managers comply with GAAP’s spirit, and not just its letter.

In other words, we are calling for a voluntary move toward reporting market values without abandoning the status quo, however useless GAAP financial statements might be. If managers, accountants and auditors believe that value-based information can be usefully presented, then they should provide it even if no one else does. After all, until GAAP is completely altered, historical costs must be reported. Why let obsolete rules that mandate reporting useless information keep management from providing users with the information that they want in supplemental form?

Think about it: If market value information is demanded, if consumers will pay for it, if it can be produced and delivered, and if no one else is providing it, then reporting it is a surefire opportunity to be more productive, more economically enriched and more personally satisfied because you’re doing something worthwhile. If society is willing to allocate wealth to accountants even when GAAP financial statements are not very useful, think how much more money will flow to those who produce truly useful reports.

Furthermore, think of the remarkable opportunity that exists for auditors who actually understand that their social and economic function is to add value to information by increasing its reliability. If they can earn a living by attaching opinions to financial statements that contain irrelevant information, how much more could they earn if they were to actually perform audits that made value-based information sufficiently reliable to let users actually depend on it?

Because their clients’ GAAP financial statements cannot ever be made useful, today’s auditors are hired merely to bring the statements into legal compliance. If they were to actually add value to useful information that investors want, they would be able to make a great deal more money. In addition, they could take more personal satisfaction with the product of their time and talent because it would be helpful to both individuals and society as a whole.

Some readers may wonder what we mean when we assert that financial statement users are willing to pay for more useful information. Are we suggesting that managers and auditors charge users for more useful annual reports? Not at all. Instead, we trust the market mechanism to work in accordance with these four economic axioms that undergird Quality Financial Reporting:

  • Complete and otherwise useful information reduces uncertainty for investors and creditors.
  • This reduced uncertainty diminishes risk for investors and creditors.
  • This diminished risk makes the investors and creditors satisfied with a lower rate of return.
  • This lower rate of return translates into a lower cost of capital for securities issuers and produces higher security prices.

Therefore, better information inevitably leads to lower capital costs and higher stock prices. Just as inevitably, poor information leads to higher capital costs and lower stock prices.Accordingly, providing useful information will spur the capital markets to impose smaller discounts on expected future cash flows because they will be more confident about their amount, timing and uncertainty. As a result, managers who spend more money to produce more useful information, including hiring auditors to verify market values, will be rewarded far in excess of what they spend.
Because this powerful economic incentive is already available, we refuse to stake the growth of value-based accounting on pushing a huge and controversial reform through a tortured and resistant political process that is dominated by those who are profoundly opposed to change.

Instead, we want to convince a few managers to hear our different drum and dive into reporting truly useful information without waiting for some authoritative body to create new rules. After all, can you name one truly worthwhile innovation that ever came to accounting practice through the standard-setting process?

So there you have it. We won’t ram value-based accounting down anyone’s unwilling throat. Rather, we see the current dismal state of financial reporting as an opportunity of epic proportions for open-minded and ambitious people to take the initiative, report truly useful information, and reap the inevitable economic rewards.

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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