The Spirit of Accounting

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On Dec. 12, 2013, Professor Abraham Briloff passed away at the age of 96, thus taking from us a man who was a giant of our profession because of his long-standing advocacy for truth in accounting. As history shows, his stances often provoked negative responses from many who failed to comprehend that they needed to change their behavior for the good of others, and for their own good as well.

Two years ago, we received an e-mail message about a column of ours: "That was a great piece you published in the current issue of Accounting Today. Keep the Faith -- Happy Holidays." It was signed "Abe." While we could never aspire to be all that he was, we were and remain inspired by his willingness to confront those who bring accounting down instead of raising it to a higher level.

In his honor, we're reprinting a column from August 2006 that describes the pathological fear of truth-telling displayed by managers when accounting for their defined-benefit pension plans. Our focus was on the flimsy, even puerile, defenses offered up by many of them.


Several times before, we have written about the Financial Accounting Standards Board's need to reform its standards for pensions, mostly in support of its modest [2006] proposal to move the off-balance-sheet assets and liabilities onto that statement. To avoid controversy, FASB left the expense untouched but is expected to thoroughly reconsider it in a Phase 2 project.

Despite this caution, the comment letters for Phase 1 [which led to issuing SFAS 158 in 2007] show that this go-slow approach certainly has not sheltered FASB from the same self-serving, inane arguments that were offered up two decades ago.

As we see it, like psychologists who force troubled patients to confront their worst fears, FASB has once again made management come to grips with their pensionaphobia, which, simply put, is the fear of telling the truth about one's own pension plans. For years, managers pretended the fabricated SFAS 87 numbers in the statements were authentic and ignored the relevant (and revealing) numbers hidden away in arcane footnotes where they don't have to be explained in earnings calls and releases.

It comes as no great surprise that these managers continue denying their neurosis. The consequence is that FASB is receiving comment letters that offer up irrational, even foolish, resistance to its proposal. As we see it, pensionaphobia is a complex syndrome that comprises several other phobias described below.



One component of pensionaphobia is the intense fear of reported liabilities. Strangely enough, managers who suffer from liabilitaphobia actually love going into debt but are deathly afraid of reporting their obligations on their balance sheets. The phobia manifests itself in accounting for pension plans, of course, but we also see it in their willingness to enter into sophisticated leases that avoid capitalization.

The best cure for liabilitaphobia is a large dose of common sense mixed with responsibility. If they're going to enjoy the benefits of liabilities, then they have to face reality and report their existence and their size, and their impact on earnings. Who knows, once they come to grips with their risks, they might not want to have so many of them ... .

What happens if this condition isn't treated? These delusional managers vainly hope the capital markets will reward their seemingly sound fiscal management as evidenced by their misleadingly low reported debt-to-equity ratios. As it turns out, though, the markets know real liabilities are missing from balance sheets, and instead respond to managers' lack of forthright reporting with depressed stock prices - just the opposite of what they want.



FASB's March 2006 exposure draft has provoked cases of the formerly rare PBObaphobia, which is an abject fear of the projected benefit obligation measure of pension liabilities. The need to use the PBO, which incorporates expected future salaries, arises because management promised to pay defined benefits based on future salaries. This provision in DB plans makes them different from defined-contribution plans where employers incur expense equal to a percentage of today's salaries. In contrast, DB plans cause employers to incur expense equal to a percentage of future salaries. The resulting higher costs and obligations are obviously different and financial statements are not reliable if they don't reflect those differences.

In producing SFAS 87, FASB opted to use the PBO for most purposes, using the accumulated benefit obligation, which is based on current salaries, for only the minimum liability provision. For 20 years, the difference has been a non-issue. But now [in 2006] that FASB intends to reflect underfunded liabilities on the balance sheet, a great many managers have suddenly grasped that the ABO is the liability's only true measure. (There is a strange similarity in their comment letters, which looks to us like someone coached these folks. They use similar language, for example, and they refer to the liability definition in the conceptual framework.) They also claim that they can instantly wipe out the liability and settle it at today's balance. To them, the arguments must seem convincing. But to those who didn't just discover the framework, they are naive.

Because of management's absurdly risky open-ended promise to pay an unknown amount, the only way to produce faithful measures is to predict likely future salaries. The pension obligation is simply understated by the ABO estimate because it is produced under the assumption that the future payments will be based on today's salaries.

With regard to the managers' newfound affinity for reporting liabilities at their settlement amount, we wonder whether they're now willing to report their bond liabilities and accounts payable at their settlement values, too. Further, if they like settlement values for liabilities, symmetry demands that they should also report all their assets at their liquidation values. In their shortsighted haste to make a point on pensions, they have ironically thrown their support behind market value accounting.



A large proportion of comment letters contained pleas to delay liability recognition to avoid putting the writers' firms in jeopardy of violating loan covenants. These managers obviously suffer from covenantaphobia, which is the fear of being discovered to have violated binding contracts.

We are resolute in condemning this argument as unethical. Debt covenants are imposed on borrowers by creditors to ensure that the former don't endanger the latter's ability to collect.

There is no trustworthiness in borrowers who plead with FASB to keep the truth under wraps a little longer so they can continue to mislead their creditors. Covenants can be effective only when both parties know the full truth. It cannot be FASB's business to harm creditors by hiding their debtors' liabilities.

If covenants have been violated, it's because borrowers went too far into debt, period. Let the truth be revealed and let the chips fall. Neutrality demands that the board turn a deaf ear to covenantaphobes' anguished cries.



Another pension-related syndrome is volatilaphobia, the abject fear of volatility. This is the most destructive of them all and is the main source of the really bad practices in SFAS 87.

FASB's pity on volatilaphobes is a prime reason why it created the original convoluted reporting model in the 1980s. The present board members are temporarily caving into the same pity in their decision to leave the expense smoothing practices intact, at least until Phase 2 [which is not yet on FASB's active 2014 agenda]. Although the idea behind the board's two-phase project was to avoid controversy, the opponents of change are still objecting.

Unfortunately, their volatilaphobia is so intense that they can't see that FASB's forbearance won't last. The current board members are united on these issues and we expect the Phase 2 standard to shake things up pretty thoroughly. Of course, it will be tempting for the board members to slip in a temporary compromise or two to assuage the complainers, but they know that would not be a good idea.



It turns out that pensionaphobia and all its sub-phobias are symptomatic of a broader and totally destructive neurosis that we call veritasaphobia. Indeed, we find that virtually all complaints against the board's proposal grow out of managers' fear of letting the truth be known.

Bad accounting has allowed them to pretend they weren't in debt and that the annual expense isn't volatile. This delusional condition must come to an end, now.



The best antidote to veritasaphobia would be a widespread infusion of fibbaphobia, which used to be prevalent when accounting was a noble profession, instead of an accommodating service industry. This phobia is simply the fear of fibbing, which is not telling the truth to avoid negative consequences from poor decisions and actions.

A lot of us developed fibbaphobia as youngsters through repeated applications of belt and switch, but apparently that teaching wasn't universally applied because fibs are part of not only pension accounting but virtually every other area of financial reporting. This is all the more reason to pity the sad state of ethics for preparers and auditors, and that's no lie.


So, we again implore today's FASB to tackle the second phase of the pension problem and get the unadulterated truth in financial statements. The solution is simple: Account rationally and separately for the income statement consequences of changes in the pension fund asset and benefit liability (which are already measured at fair value) by separately and clearly reporting their amounts as investment income, labor costs, interest expense, and gains and losses from amendments and modifications.

In other words, the best cure for those phobias is pure and simple veritas, and we know that Prof. Briloff would agree.


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 or Accounting Today. Reach them at paulandpaul@qfr.biz.

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