In August, Securities and Exchange Commission Chair Mary Jo White appointed James Schnurr as chief accountant. In thinking about his agenda, we recalled advice we offered in 2009 to then-Chair Mary Schapiro, including an eight-point "to-do" list for her yet-to-be-named chief accountant. Looking back, we believe the flap over convergence and International Financial Reporting Standards in the U.S. prevented progress on those highly important issues. We're offering an updated list with the hope that more can get accomplished.

Although capital markets have largely recovered from the 2008 credit crunch, some risk remains that another calamity might be around the corner. In order to achieve more stability, we encourage the SEC's new top accountant to lead the way toward significant financial reporting reform in the United States and abroad. Thus, we encourage the chair to cast a new vision for real transformation and empower Chief Accountant Schnurr to bring it to fruition.

Here are eight items for his "to do" list:

1. Staffing. Chief accountants can be only as good as their staff. Traditionally, the cadre consists of commission regulars working alongside professional fellows from large accounting firms. That's fine, but the new chief accountant should follow the Financial Accounting Standards Board's lead and add experienced financial statement users to the team as well. All too often, accounting issues are defined, analyzed and resolved by accountants without fully considering users' needs and interests.

Beyond that, the chief accountant must challenge his staff to look critically at the status quo and create meaningful progress toward serving the markets' needs.

2. Mark-to-market. We're amazed at the legs of the anti-mark-to-market movement. We still find people who should know better essentially proclaiming that telling the truth about fair values is detrimental to capital markets and the public interest. This poppycock needs to be put to rest, and the chief accountant can take the lead.

Mark-to-market opponents seem to hope that users will simply capitulate and use GAAP financial statements as if they're trustworthy and helpful, even though they don't really provide the useful information they need to support their analyses.

To the contrary, if financial statement users' needs aren't met, they may choose to not invest in a target company, to invest only after deeply discounting their bid price for its stock, or to spend a lot of time and money trying to estimate their own values and still end up discounting their bid price to compensate for their effort and risk. In all three cases, demand for the stock withers and its market price goes down.

3. Pensions. The chief accountant should encourage FASB to complete its long-neglected project that aims to explicitly and immediately report defined-benefit pension-related effects on employers' income. It would also help to disaggregate unlike things that are mixed together and offset like operating expenses and investment gains.

The new standard should eliminate current Rube Goldberg-esque processes that smooth reported income while real income gyrates. While market returns on pension assets are much better than they were following the credit crunch, reporting expected results instead of actual results remains totally misleading.

The new chief should also push FASB to abandon offsetting employers' pension assets against liabilities because it camouflages excessive leverage.

4. Leases. Another big hole in financial statement integrity is the longstanding but shameful tolerance of using operating leases to achieve off-balance-sheet financing. The SEC's own literature estimated that leases produced $1.25 trillion of OBSF in 2005, and we can't imagine that the amount has declined since then.

Ironically, when the 2009 version of this column appeared, we wrote that FASB was "poised to finish a project that would put these leases on balance sheets, and the chief should protect the board against whiny opponents to this crucial reform."

Boy, were we wrong on both points! This project is still stuck in controversy six years later and, even though both FASB and the International Accounting Standards Board are suggesting that a converged accounting standard might come out in the spring, they have bent over backwards to meet their critics' complaints.

Candidly, we hope it doesn't get released at all! The whole problem has persisted for decades because standard-setters have been much too willing to compromise away the obvious truth that all leases create assets and liabilities that belong on lessees' balance sheets, and totally reluctant to let profits show up on lessors' income statements after they sell valuable economic rights to their lessees.

Speeches and other communications from the chief accountant could help FASB back away from this byzantine proposed standard and develop something more useful without the IASB. After all, complex leases are fabricated primarily to evade the rules' intent and achieve off-balance-sheet financing. If every lease asset and liability has to be recognized on balance sheets at their real values, all that deceptive effort will disappear.

5. Liabilities and equity. Speaking of liabilities, few realize that an earlier FASB was virtually convinced that all items on the right side of the balance sheet are liabilities, with the exception of common stockholders' equity. A 2007 preliminary views document (Financial Instruments with Characteristics of Equity) explained that the board favored shifting everything but the very most basic ownership component out of equity. Preferred stock? It's debt. Stock options and warrants? They're derivative liabilities, and should be marked to market to boot. Convertible bonds? They're both bond and derivative liabilities with nary any equity involved. Accumulated other comprehensive income? No such thing!

The balance sheet's integrity has been compromised away for decades, and this new structure is essential for restoring it. This shift will profoundly affect many other things, including the false perception that liabilities are economically stable financial instruments because they're reported at book value instead of their economic value.

6. Ending the IFRS fiasco. At a December 2014 SEC/Public Company Accounting Oversight Board/American Institute of CPAs conference on reporting issues, Chief Accountant Schnurr started reducing the chaos that previous SEC Chairman Christopher Cox created in 2008 with his plan for replacing FASB with the IASB. Even Cox now believes that this effort was a mistake, and so does everyone else except for the IASB's self-serving politicians.

In case you missed it, Schnurr basically explained that there is no likelihood that U.S. companies will be compelled to adopt IFRS, but suggested that managers could voluntarily provide supplemental disclosures of IFRS-compliant financial statements or specific items. Lots of issues have to be resolved, including the question of whether the disclosures will need to be audited.

(Regarding that last point, here's our advice to managers: Get audits for only the information you would like users to believe ... .)

Our readers know we're convinced that switching to the IASB and IFRS was an amazingly bad idea that could never have been implemented. There's simply no need to entertain this controversy any longer.

Although we think that this new Schnurr Plan reduces ambiguity, our direct admonition is that the SEC chair and the chief accountant should just drop the IASB issue immediately and permanently. They should take it off the table for good and put an end to any lingering traces of the misguided uncertainty that should never have been created in the first place.

7. Building up the IASB. Once that decision is reached, the chair and chief should help the IASB focus on its non-U.S. responsibilities and constituencies. A key move would be encouraging the IFRS Foundation to enhance the IASB's financial and political independence and hence its ability to serve users' needs. We see that this board's domination by auditors and preparers, as well as European politicians, is stifling its ability to reform practice in its sphere of influence.

Specifically, the foundation's contribution-based funding model needs to be replaced. It's incongruous to have managers fund the board that regulates their actions. It's also wrong to depend on national governments that can't keep their hands off the process.

We think it would be far better if stock exchanges around the world would impose an infinitesimal charge per traded share and send the money directly to the IASB. Think of it as "Pennies for Principles." Everyone would be better off if users footed the entire bill for better international accounting standards.

8. Challenge auditors. Our interpretation of history shows that auditors, despite expressed commitments to independence and integrity, have fought hard to keep the status quo in place. In doing so, they've also helped make financial statements inadequate for fully informing their users. Schnurr should challenge them to reconsider their outmoded paradigms and their continued resistance to reforms that would better serve society while opening up vast new professional and economic opportunities for them.

Specifically, auditors accomplish relatively little by attesting to compliance with GAAP (or IFRS) when those standards don't put useful information in financial statements. Thus, the chief accountant should engage the PCAOB and audit leaders to help them comprehend that they're not accomplishing their social mission of making financial statements relevant, complete and reliable so that users find them helpful.

This mission is quite different from attesting to compliance with GAAP anchored in historical costs and other forms of biased and unreliable information. For example, auditors could create vast amounts of usefulness by assuring users that market-based information is reliable.

This reform would be disruptive, but it's going to happen sooner or later, so the new chief might as well help get it started.



To summarize: The time is right for significantly improving the status quo, and it's never been quite as susceptible to change as it is now because of the economy's ponderous recovery, strong public opinion against corporate malfeasance, and a new national attitude that is growing even more discontented with the way things are.

An opportunity like this comes only once in a generation or two, and it should not be squandered.

Paul B. W. Miller is an emeritus 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 or Accounting Today. Reach them at

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