The Spirit of Accounting: 403 and done

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Paul Miller and Ed Ketz published the initial version of “The Spirit of Accounting” in the Jan. 22, 1996, issue of Accounting Today. We chose the column’s name to emphasize that the spirit of all ethics rules and accounting standards should take precedence over any contrived interpretations aimed at justifying objectionable actions.

The 100th column, the final one with Ed, appeared in July 2000 and was followed the next month by the first one produced by the two Pauls. Now, in February 2018, 22 years after it all started, this installment is the 403rd and final regular column, although we may write ad hoc essays in response to special circumstances.

We’re clearly not stopping because we’ve run out of topics. Rather, we’re finding ourselves being pulled strongly toward other interests in our actual and impending retirement. Furthermore, we’re seeking relief from the relentless conveyor-belt of monthly deadlines that just keep coming. Since the beginning, we’ve had to start working on the next column as soon as or even before we finished the previous one.

We’re also content because we know that we have put our ideas out there and that they will be available for years to come, encouraging significant changes. Inevitably, those reforms will be implemented, out of necessity and despite the efforts of those who would try to prevent progress for the greater good in order to preserve their own private comfort zones.


Naturally, we have mixed emotions about calling it a day. Specifically, we’re experiencing joy mixed with elation!

Seriously, we’re exhausted yet amazed by this 22-year run with only one missed deadline. In addition, we’re indebted and thankful to our three editors, Rick Telberg, Bill Carlino and Dan Hood.

Most of all, our heartfelt gratitude goes out to our wonderfully loyal readers over the decades, who, we’ve been told, have consistently described our column as a favorite part of their reading experience.


However, we wouldn’t be telling the whole truth if we didn’t admit to frustration with the lack of advancement along the lines we’ve proposed and reiterated for so long. To name names, we’re vexed by these groups:

  • Auditors who haven’t begun to comprehend that their opinions actually deliver red-letter warnings that users should not rely on the accompanying financial statements because they’re chock-full of non-useful, GAAP-compliant information. In other words, their audits do little or nothing to enhance the statements’ usefulness.
  • Practitioners who cannot and will not grasp the obvious flaws in GAAP statements or the magnificent opportunities inherent in providing useful, non-GAAP financial reports that are more frequent, complete, clear, trustworthy, and up to date.
  • Managers who stubbornly fool themselves into thinking they can use GAAP reports to manipulate the capital markets. How on earth can infrequently providing largely useless information about their companies ever produce higher stock prices?
  • Financial statement users who refuse to acknowledge the countless defects and shortcomings in today’s reports. We encourage them to apply their massive but dormant economic power to both demand better information and reward its providers with higher market valuations and lower capital costs.
  • Governmental regulators who haven’t rocked the boat when it comes to reforming financial reporting. Notably, we draw no distinction between Democrat and Republican administrations for failing to do anything worthwhile.
  • Nongovernmental regulators, specifically all standard-setting boards, who have steadfastly protected the status quo instead of proactively initiating desperately needed enhancements. We have often said that the Financial Accounting Standards Board’s current single-minded and misguided focus on simplification and minimizing managers’ compliance costs verges on being irresponsible. Our criticism is especially sharp because the board currently has more independence and political power than ever before in its 44-year history.


With regard to what we have accomplished, we’re pleased that we’ve been able to challenge the kingpins of a great many specific companies, CPA firms and other organizations for failing to do what is right.

For example, we have blown the whistle multiple times since 2002 on Barry Melancon, whose bailiwick now consists of two incompatibly different AICPAs. The first is the previously prestigious and effective American Institute of CPAs he inherited but has now perverted into a commercial enterprise with little or no remaining prestige. The second is the new Association of International Certified Professional Accountants (“AICPA 2.0”) that he conjured out of thin air. We’re irrevocably disgusted by his transparent manipulation of the membership balloting process that, among other things, he scheduled for the week of April 18, 2016, when many members who would be opposed were suffering from post-busy-season traumatic shock and otherwise off the grid.

Although we have repeatedly pointed out numerous stumbles and failings by the
AICPA’s elite, that group completely dominates the now purely political organization after destroying its former unambiguous professional identity. Because the numbers speak for themselves, we report without comment that the institute’s 2015 Form 990 discloses that Melancon’s total compensation for that fiscal year was $2,080,397. In addition, Cynthia Fornelli was paid $1,827,955 and the average for the next three highest-paid employees was $814,289.

In addition, a serious cloud of uncertainty surrounds the legitimacy of the AICPA 2.0 joint venture with the Chartered Institute of Management Accountants because of evidence that the latter unlawfully entered into the deal without clearing it with the appropriate U.K. governing authorities. In addition, we challenge the ethics of all U.S. CPAs who call themselves CGMAs, with special scorn for any who display CIMA’s FCMA credential without completing the mandatory set of 12 examinations.

We have also frequently criticized FASB, a former employer for both of us, and the subject of five editions of our book, “The FASB: The People, the Process, and the Politics” (the fifth was published by Sigel Press in 2015). While we have immense respect and empathy for the great many intelligent people who work there, we’re convinced a gaping chasm exists between what the board has done in comparison to what it could and should have accomplished in light of its budget, talent and political power.

Thus, we cannot exit the stage without once again calling upon FASB to start producing brand-new significant standards instead of merely papering over the cracks in the old ones every few decades. We’re thinking of lease and pension accounting in particular, but how can its people continue to ignore the insidious misinformation produced by systematic depreciation and other pervasive inferior practices?


We’re especially satisfied with what we achieved through more than 20 columns that challenged the popular yet superficial notion that adopting international accounting standards in the United States would be a great idea. From the beginning, we were virtually alone in objecting to this scheme when everyone else was saying the train had already left the station. Thank goodness this column allowed us to publicly push back against the faulty conventional wisdom and explain why the outcomes of implementing it would be not merely bad, but very bad, even disastrous.

Perhaps our most pivotal contribution was proclaiming that the “rules-based versus principles-based” controversy was only a deceptive variation of the totally irrelevant question that asked, “Which set of existing standards (GAAP or IFRS) is better?”

Instead, we believe we were the first to frame the issue as the entirely different political question of, “Which standard-setting board would be better for the U.S. economy and its capital markets?” We’re convinced that focusing the debate on that point exposed the deficient premises behind the warm-and-fuzzy-feel-good and otherwise superficial pipedream that it would be wonderful to give the International Accounting Standards Board power to establish U.S. standards.

Our opposition to the seemingly unstoppable support for that fantasy put us in nose-to-nose conflict with some of the world’s most powerful factions, including the major international accounting firms, the Securities and Exchange Commission, Congress, the AICPA, the IASB’s management, Paul Volcker (former chair of the Reagan-era Federal Reserve), multiple prominent politicians in the U.S. and Europe, many media commentators, textbook authors and publishers, and virtually all our academic colleagues. The exceptions were SEC Chair Mary Schapiro (2009-2012) and her chief accountant (now FASB vice-chair) Jim Kroeker, whom we encouraged and otherwise supported as we could.

The final tipping point that defeated this misbegotten political campaign came in April and May 2014 when we wrote two consecutive columns that exposed the byzantine plan by then-SEC Chair Mary Jo White and her chief accountant, Paul Beswick, to coerce the Financial Accounting Foundation into making a multi-million-dollar contribution to its counterpart, the International Accounting Standards Foundation. Although White and Beswick managed to get $1 million sent across the Atlantic, doing so cost them greatly and severely wounded the relationship between the board and the commission. In White’s case, we exposed her press release as a disingenuous effort to look like she had nothing to do with the “gift” despite abundant evidence to the contrary. Although we don’t know whether our columns had anything to do with it, Beswick abruptly left the SEC on May 15.

This evidence suggests that we really helped turn the tide by critiquing the key parties’ subterfuge and/or ignorance that made them willing to embrace the IASB’s standard-setting system even though it would have worked to the detriment of all the U.S. capital markets’ constituents.


We’re also satisfied with the literature we have produced on the innovative concept we call “Quality Financial Reporting.” Leading up to and following the 2002 publication of our book with that title by McGraw-Hill, we have repeatedly explained that managers’ surest route to lower capital costs and higher and more stable security values involves a steadfast willingness to tell the truth, the whole truth, and nothing but the truth, as opposed to begrudgingly putting out infrequent reports that minimally comply with politically compromised GAAP.

Here are the four postulates of QFR:

  • Incomplete information creates uncertainty for investors.
  • Uncertainty for investors increases their risk.
  • Higher risk causes investors to demand higher rates of return.
  • Those higher returns equate to higher capital costs for securities issuers and lead to lower valuations of their shares and debt instruments.

Therefore, if managers really want lower capital costs and higher values for their securities, they should start by voluntarily providing complete information that reduces investors’ uncertainty.

We’ve not yet encountered a legitimate rebuttal to those postulates. Instead, the most common retort we’ve heard is this ad hominem cliché: “You guys live in an ivory tower.” As we’ve openly confessed, we know we do, and we find the view from up here enables us to see things (especially opportunities) that accountants in the trenches don’t have time to think about.

We’re totally sure the QFR revolution will some day gain momentum when innovative managers begin to comprehend how much benefit they stand to gain from building mutually beneficial information-driven partnerships with capital markets, in much the same way 20th century managers partnered more closely with their labor markets through human resource management, their customer markets through total quality management, and their supply chains so they could implement just-in-time manufacturing.

When that paradigm shift occurs, as it surely must, perhaps at least some credit will come our way for being there first, and often.


As for our future, we hold out the possibility that we may come back, but only infrequently, to shine light into dark corners created by accountants and managers. In the meantime, we have new pursuits that will keep us serving others. So long, and may all your debits equal your credits.

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Accounting standards Financial reporting IFRS GAAP