In a Nov. 3, 2008, press release, the Financial Accounting Standards Board and the International Accounting Standards Board jointly announced they would be holding three round tables in the U.K., the U.S. and Japan to "identify financial reporting issues highlighted by the global financial crisis."This idea started us considering whether we could help by articulating what role financial reporting, and those who engage in it, can play before, during and after a crisis. Although the meetings will be over by the time our thoughts are printed, perhaps they will be useful in subsequent deliberations.


According to common sense, and as expressed in FASB's Conceptual Framework, the objective of financial reporting is to provide useful information for investors, creditors and other users to support their decisions.

In placid times, this objective is met by sending signals about what's going well and what isn't. This information can help the capital markets, managers, regulators and policy-makers anticipate detrimental situations. Transparent reports will give hints, for example, that capacity is strained or underutilized, that sales are lagging or exploding, that assets are accumulating or dissipating, or that leverage is rising or falling.

In the current situation, financial reporting could and should have made it clear that huge risk concentrations were growing beyond reasonableness. If the reporting system had provided timely and clear signals that mortgage-backed obligations were spreading into all kinds of portfolios, not just those held by sophisticated institutions, the world would have had earlier warnings that some restraint was needed.

Furthermore, it could and should have raised issues about the uniformly high ratings for these time bombs that rating agencies handed out like candy. For goodness sake, even credit unions loaded up on MBOs, seeking the holy grail of high returns and low risk, but ending up with just the opposite.

In other words, the role for financial reporting and those who engage in it before a crisis occurs is to reveal the truth honestly, openly, completely, clearly, unambiguously, and with sufficient frequency to be timely.


Once a crisis is under way, financial reporting should provide information that identifies areas under stress and the impact of that stress, including growing expenses and debt or shrinking revenues and assets. The information should serve multiple purposes. First, investors and creditors need to know how their future cash flow prospects are affected, so they can be smart in selling, restructuring or otherwise responding. Second, managers need useful information to know where problems lie, their nature, and especially their magnitude, and they need it quickly.

Third, regulators and policy-makers cannot make valid decisions without being fully informed. With more knowledge of the pressure points, the indicators' magnitude and direction, and the problems' causes, they can make timely decisions to shape behavior and otherwise nudge affected institutions and economic sectors back on track.

For example, in the 2008 crisis, the first signals to arrive indicated that some debt security portfolios were losing value because of non-performing underlying mortgages. Then it slowly dawned that these toxic securities were scattered everywhere. In some cases, there were just a few, but in other cases, their concentrations were way out of proportion. By the time managers realized that their portfolios were polluted, many were beyond recovery, while others could be rescued, but only after incurring huge losses and completely rebuilding their capital structures with infused private or government money.

These declines in value had multiple impacts, especially on perceived risks of defaults of other debt instruments, which in turn led to the shutting off of the gushing credit spigots that so many had become accustomed to using to slake their thirst for cash.

In the turmoil, severely misled managers began to demand relief by calling for eliminating mark-to-market accounting, which was, ironically, the only source of useful information that was actually revealing the existence, nature and extent of the toxicity. Adding to the confusion was, we speculate, the auditors' tendency to interpret SFAS 157 aggressively by concluding that only a few distressed sales defined market value. If so, complaints about mark-to-market were misdirected, because the problem wasn't the method but how it was being applied. We fault the shrillest voices for first not grasping that difference and then overreaching to eliminate the only source of useful information.

In other words, the role for reporting and those who engage in it while a crisis is going on is to reveal the truth honestly, openly, completely, clearly, unambiguously, and with sufficient frequency to be timely.


The role for financial reporting when a crisis is ending is to provide useful information that signals when, where and how the economy is recovering, and by how much.

To help, financial reporting must not resort to the hoary GAAP devices that defer and smooth revenues and expenses to create apparent placidity. Like a physician looking at the EKG display while resuscitating a heart attack victim, policy-makers and investors need every little blip of activity to be accurately and immediately displayed. This is no time for assumptions based on either hopeful or pessimistic outlooks. The premium is on facts, pure facts, lots of them, and they're needed now.

Optimism and pessimism are better left to pundits and analysts, not accountants. When accountants massage the message, the capital markets cannot readily decipher whether an uptick represents a modest initial recovery or a full-scale, relax-we're-out-of-the-woods return to normalcy. On the other hand, information shouldn't be shaped by an oh-my-goodness-the-sky-has-fallen-and-we'll-never-get-out-of-this-mess pessimism that's so characteristic of auditors.

In addition, financial reporting should generate feedback to help policy-makers understand what created the crisis, so future generations can look for the same harbingers and try to avoid the problems.

In other words, the role for financial reporting and those who engage in it after a crisis has passed is to reveal the truth honestly, openly, completely, clearly, unambiguously, and with sufficient frequency to be timely.


It's not carelessness that caused us to assign the same role to financial reporting in all three phases of a crisis. Among other reasons, we used that monotonous chant because useful information is always, well, useful. Good reporting is helpful whether there is a crisis or not. There is no substitute for truth and there is no excuse for not telling it clearly and often.

Beyond a doubt, the only information that meets all these needs is based on economic values that reveal the cash flow potential of assets and liabilities. Getting this information to capital markets and the economy at large demands mark-to-market accounting for all assets and liabilities.

In addition, off-balance-sheet financing needs to be eliminated. At the same time, balance sheets should be purged of all the useless stuff that abides there through the accounting profession's longstanding complicity (or duplicity) with management in creating financial fiction. Recording goodwill for the full difference between purchase price and identifiable net assets is just one example. Balance sheets are a mess because other assets, notably R&D, are not reported, pension assets and liabilities are offset, and equity has become a dumping ground for unrealized income.

For income statements, it's time to eliminate revenue and expense measures based on assumptions, most prominently systematic depreciation, defined-benefit pension costs, and deferred income taxes. These things are more toxic than mortgage-backed securities.

Increased reporting frequency would be another huge reform. The fiftieth anniversary of compulsory quarterly reporting is approaching, and it's well past time to apply modern technology to getting information distributed more quickly than once every 90 days. We've said it before: Most laptops have more computing power than corporate mainframes had when quarterlies were made mandatory. Does it make sense to leave everyone guessing for three months? Not at all.


We close by saying that we respect the FASB/IASB tandem for stepping up to the task. We especially want them to be sure that they don't need to shoulder the whole blame for the crisis or the whole burden for making financial reporting more useful for avoiding and surviving future crises. They can lead, of course, but the greatest responsibility rests on those who actually do financial reporting, specifically managers and auditors.

Progress will occur when managers comprehend that capital markets are their friends, not their adversaries, and that trust and truth-telling are foundations for those friendships. It will also occur when auditors realize they accomplish nothing worthwhile by attesting to compliance with generally accepted standards that don't produce useful information.

A real crisis like this one should foment change and epiphanies. Although the last big crisis brought an end to the miscreant behavior at Enron and Andersen, as well as others, and brought Sarbanes-Oxley reforms that seem to have made a difference, obviously more could and should have been accomplished. If you want a silver lining on the current situation, perhaps all the stress will open the door to substantive reform in financial reporting and corporate governance.

We certainly hope so, and we want to believe our readers feel the same way.

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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