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

Over the last three years, Paul Miller has been living a double life - he’s been both an accounting professor and the creator of a new undergraduate program in professional golf management at his school. As a result, he has been thinking more about the game than usual.

It was out of this ferment that he drew a connection between financial reporting and scorekeeping in golf that led to our publishing a column in July 2001. We have always considered it one of our better ones, and feedback confirms that others have enjoyed it, despite its sharp criticism of generally accepted accounting principles and those who create and implement it.

We offer it again for those who missed it or who may have forgotten its message.

For several reasons, we have been thinking about golf lately, and it’s occurred to us that the game would be a lot different if players kept score using generally accepted accounting principles. Along those lines, we’ve imagined that a standard-setting agency for scoring might create principles for a “generally accepted golf scoring” system called GAGS.

Of course, one conspicuous difference would be that the scorecard would include 10 pages of footnotes.

Included in GAGS would be the practice of allocating a predicted number of putts per round among the holes expected to be played, all without regard to the actual number. For example, it might be common to allocate two putts to each hole. While this practice would eliminate all fear of the three-putt, it would also do away with one-putts and chip-ins, but that would be the price of eliminating both volatility and the risk associated with reporting what really happens.

Another GAGS principle would allow for off-scorecard-sand-shots when certain criteria are met. Even though anyone could observe that a ball landed in the trap and that the golfer took several shots to get it onto the green, the rules would allow players to leave those strokes out simply because they didn’t intend for the ball to wind up in the sand and didn’t want to look bad.

Another popular feature of GAGS would be the deferral of strokes in excess of par. Under this system, players would record no score higher than par on any hole despite actually having a bogey, double bogey or worse. The excess strokes would simply be deferred without penalty until they could be offset against birdies or eagles that might be scored in rounds to be played in the future, if ever. Again, the goal would be to eliminate volatility by destroying any connection between the carded scores and actual results.

Another standard would apply the lower-of-past-or-present-score method. Under this practice, golfers would maintain records of the lowest score ever achieved on each hole. Then, during a real round, they would enter an actual score on a given hole only if it was lower than their previous low score.

One more feature of GAGS would include pairs of alternative practices, one preferable and the other merely acceptable.

For example, consider shots into water hazards. When players hit into the drink, they would have the option of adding that stroke plus a penalty to their score, or merely disclosing them in a footnote that shows the pro forma score computed as if the shots had actually been counted.

Now, try to imagine what would happen when golfers using GAGS tried to compete in tournaments with players who apply the strict rules of golf. Further, suppose that all spectators are aware of GAGS but only want to know the real number of strokes taken.

In these circumstances, wouldn’t the prize money would go to the players who have the fewest actual strokes, instead of those who merely report the smallest number?

It doesn’t take much imagination to see the connections between GAGS and GAAP:

● The really helpful information appears in the footnotes, not the financial statements.

● Instead of allocating putts equally among holes, accountants allocate depreciation equally among years without ever checking to see what happened to the asset’s real value.

● Carefully crafted agreements allow lease liabilities to be left off the balance sheet.

● Lower-of-cost-or-market is still applied to inventories; even though it is no longer applied to investments, FASB requires managers to write down impaired assets but forbids writing up enhanced assets.

● The deferral method causes companies that actually pay income taxes to postpone reporting the expense until later years, if and when reported pretax income is higher. Both of us personally gag over the way undesired gains and losses for defined-benefit pension plans are deferred simply to avoid reporting the volatile truth.

● SFAS 123 allows managers to describe options-based compensation in pro forma footnotes instead of deducting it from reported earnings.

What’s important to realize is that the capital market doesn’t consist of ignorant or complacent spectators; instead, its sophisticated participants watch each public company carefully and develop their own scorecards based on actual events without believing the compromised, predicted, smoothed, deferred, and grossly incomplete and misleading numbers in GAAP reports.

The market’s prize money goes to those who create greater future cash flow potential instead of those who fabricate the highest reported earnings.

This analogy shows that it is foolish to believe that GAAP statements even approximate actual results and conditions. Just as the winner in a strict rules tournament has the lowest number of actual strokes, winners in the capital market are managers who are most likely to achieve the highest real future earnings and cash flows.

Even if they report the occasional bad news with candor as soon as it happens, the gallery cheers them on, and they are still eligible to compete in the future. The only permanent losers are cheaters who are likely to be banished from competing at the highest level.

It’s long past time for a change in outlook and practice. Because the standard-setting process is so compromised by political pressure and so characterized by ducking hard issues (like goodwill), financial statements don’t reflect anything that really happens. The capital market knows it and stock prices reflect it. Smart managers should stop fooling themselves because they sure aren’t fooling anyone else.

In closing, let’s hear the hushed words of a TV commentator at the first tee for the final round of the British Open: “Fans, the championship is over. Lyon Forrest and Mel Michaelson have just compared their anticipated scores for today’s rounds and Michaelson has won the tournament because his predicted score of 62 is lower than the 64 that Forrest expected to shoot. What an amazing turn of events and a great victory powered by one of the sport’s greatest imaginations!”

Nonsense, but then so are most managers’ GAAP earnings announcements.

Plus a change

This column’s first appearance predated Enron, et al, and the demise of Andersen. There is no denying that many accountants’ and managers’ imaginations definitely outran the truth.

The accounting reforms to date do not guarantee that financial scorecards will portray what is actually happening, and it is absurd to think that these or any other regulatory efforts can lead us to that goal.

The solution is for the players to understand that the game is real and that there are severe consequences for doctoring the score. The beauty of Quality Financial Reporting is that it shows that there are powerful financial rewards for counting all of the strokes. Some managers are getting the message but others are bound to be disappointed when they enter the capital market clubhouse with a scorecard that no one believes.

Incidentally, the PGM Program at the University of Colorado provides an undergraduate degree in business, 18 months of co-op internships, and outstanding PGA-designed training.

If you know of someone who is seeking a career in the golf industry, send them to this Web site: http://business.uccs.edu/goto/Professional_Golf_Mgmt.

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