The Spirit of Accounting: Four tales of futility

Register now

This column analyzes four current futile pursuits of inappropriate objectives that we think should never have been undertaken.


Our August 2012 column critiqued a simplistic letter sent to the Financial Accounting Standards Board by Congressman Brad Sherman, D-Calif., with a demand that the board retain off-balance-sheet financing to avoid the havoc that he feared would be unleashed by (get this) revealing the truth about lease liabilities. Unfortunately, he besmirched all CPAs’ reputations by citing the fact that he is one.

He’s at it again. Last September, he sent FASB an even more simplistic letter demanding that it restore the practice of capitalizing all research and development costs. (FASB Comment Letter No. 4 for Project 2016-290.)

Sherman attached his awkwardly inarticulate April 2016 letter to Securities and Exchange Commission Chair Mary Jo White, in which he whined that, “The Financial Accounting Standards Board has not responded adequately to my concerns regarding its Statement of Financial Accounting Standards No. 2 (‘FASB No. 2’). I urge you to use your oversight authority to prompt action to modernize FASB No. 2.” He obviously doesn’t comprehend that neither he nor the SEC chair should ever directly intervene in the board’s due process.

Sherman’s inane argument to FASB is based on a quote he exhumed from a dec­ades-old and now obsolete accounting theory textbook by Eldon Hendriksen (whose name he misspelled). Without citing which edition, date or page, and without describing the context, he quotes a paragraph Eldon had written long ago that said R&D costs should be matched against future revenues.

Sherman then asserted that, “Virtually every accounting theorist would reach a similar conclusion.” He’s completely off-base because no theory book is authoritative, especially any written before 1980 when FASB’s conceptual framework project disavowed matching. Further, no modern theorists worth their salt would agree with Sherman’s summary.

In fact, theory shows that cost-based measures would be misleading. On the one hand, successful R&D efforts produce assets with cash-generating abilities that aren’t adequately described by their cost. On the other, the costs of unsuccessful efforts are clearly expenses because they produce no assets. So, if Sherman really desires useful accounting, he should encourage FASB to require reporting R&D assets at market value.

Bottom line, his letters display limited financial reporting expertise and reveal that he’s lobbying on behalf of managers who want to increase reported earnings by making manipulative journal entries instead of producing additional real income.

Sherman’s pleas are futile because his motives are as transparent as plate glass.


Without any disclosure to its members, the American Institute of CPAs continues promoting the CGMA despite the possibility that the whole connivance will collapse if/when its implementation is determined to conflict with the United Kingdom’s laws.

Specifically, that country’s Privy Council has been presented with credible allegations that the board of the Chartered Institute of Management Accountants unlawfully exceeded the authority granted to it by the Crown when it participated in the joint venture with the AICPA and allowed AICPA members to display the CGMA acronym without passing an exam.

The U.K. plot thickened further last July when Charles Tilley, CIMA’s CEO, suddenly resigned soon after the AICPA’s balloting process (see “The AICPA merger ballot outcome: Everybody loses,” Accounting Today, August 2016). It seemed like he was positioned to move into a high position in the forthcoming merged AICPA/CIMA entity, but he was gone in a flash, much to the surprise of observers on both sides of the pond.

Of course, a Privy Council determination that wrongdoing occurred will completely discredit the very expensive, yet futile, misinformation-based campaign the AICPA elite is waging to concoct legitimacy for the CGMA concept.

Often thinly disguised as news, a constant stream of PR releases has been touting that CPAs who pay a fee to be able to put “CGMA” after their names are more competent than those who don’t. Instead of helping, these efforts fabricate two transparent images.

For one, they strongly imply that those who decline to participate in the program are second-class members, even though just the opposite is true. The other is the audacious claim that CGMAs who’ve never passed an exam are chock-full of sophisticated skills when the facts lead us to conclude they’re chock-full of something else. (BTW ­— why hasn’t the institute published any CGMA Exam results since first offering it in 2015?)

We conclude that CGMAs who don’t realize they’re being exploited by the AICPA are so lacking in discernment that they’re gullible. As for the many others who knowingly participate in this charade, their huge mistake is assuming that everybody else is gullible.

Our strongest criticism remains directed at those who conceived this futile attempt to conjure an illusion of special competence out of thin air. Fortunately, it has completely failed.


Former SEC Chairman Mary Jo White couldn’t resist making a futile final farewell plea for a “convergence” that would push GAAP toward IFRS. We deem her message to be the last faint echo of the disaster she created in 2014 when unnamed “senior SEC officials” coerced the Financial Accounting Foundation into doling out $1 million to the International Accounting Standards Board’s foundation. This pressure strained FASB’s relationship with her and didn’t do anything good for the then-chief accountant’s career in government service.

We don’t know what Jay Clayton, the new SEC chair nominee, thinks about international convergence, but we don’t expect any proposal for relying on an offshore financial reporting standard-setting body to gain a bit of traction with anyone in the current administration.

With that said, we strongly favor converging U.S. GAAP toward a target of producing financial reports that are full of the truth, the whole truth and nothing but the truth. The SEC can help advance market efficiency by encouraging FASB to proactively pursue a new overall strategic objective.

Alas, the board has instead put a higher priority on lesser problems. Read on ... .


We’ve been frustrated watching as FASB’s simplification initiative has generated a flood of hyper-narrow standards aimed at reducing managers’ and auditors’ efforts in producing financial reports. We’re confounded that the board is squandering its precious time and resources, instead of applying them toward reforms that would help users extract more useful information from those reports.

We know it’s an unoriginal image, but we keep thinking about Rome burning while Nero fiddled around. Here are six reasons we feel that way.

  • FASB tweaked deferred income tax accounting without doing anything to fix its triply flawed overall approach. First, existing practices undeniably overstate tax expense and deferred liabilities, thereby hiding the truth from policymakers and the capital markets. Second, if/when Congress votes to cut tax rates, all deferred liabilities will undergo instantaneous and massive decreases with equal increases in after-tax GAAP earnings as soon as the law is enacted, not when it actually takes effect. Third, the same earnings bump will occur if/when foreign profits are cleared for repatriation. FASB should forget the small stuff and get out in front of these big issues.
  • The board mildly modified share-based compensation accounting without repairing the incomplete income measures produced by basing compensation on grant-date values. This practice is deficient because it doesn’t report anything about additional economic effects caused by subsequent changes in share and option values. In contrast, more complete real results would be reported if employers initially recognized compensatory instruments as derivative liabilities at their market value and then continued marking them to market until they lapsed or were exercised. This approach would not only reveal the volatile obligations created by these plans but also include the full compensation cost in earnings. It’s past time to overturn the political compromise that FASB struck in the 1990s to help keep standard-setting authority in the private sector.
  • FASB recently addressed a minor problem with the equity method. Because any investee’s adjusted reported GAAP net income is a meaningless aggregation of questionable measures, the practice of adding a proportionate share of it to an equity method investor’s assets and earnings cannot possibly help statement users assess future cash flows from that investment. Instead, the board should just eradicate that abominable method and require all unconsolidated equity security investments to be reported at market value.
  • The board recently tweaked employers’ accounting for pension costs. It should actually eliminate the whole despicable cost-smoothing manipulative scheme that was crafted 30-plus years ago to deliberately keep useful information out of financial statements. It’s clearly time to abandon this political compromise that we rank as the worst-ever in FASB’s history.
  • FASB missed another opportunity for genuine improvement when it decided to treat debt-issuance costs as contra-liabilities instead of assets. Specifically, it could and should have deemed these costs to be expenses because they neither create assets nor extinguish liabilities. Instead, all FASB accomplished was replacing one indefensible misleading treatment with another.
  • The board also modified lower-of-cost-or-market inventory accounting by defining market as the net realizable value. For sure, it should have just adopted mark-to-market to tell the whole truth.

Therefore, we call on our colleagues at FASB to assert their considerable political independence and put a No. 1 priority on boosting capital market efficiency through radically improved financial statements. Because value-based reporting would remedy most of GAAP’s shortcomings, expanding its use is the best way to increase efficiency.

Simply put, it’s futile to waste FASB’s brain power and money trying to reduce the cost of preparing uninformative financial statements.


We believe that financial reporting faces many real problems that demand real solutions. Now. That condition makes all these other lamentably futile pursuits pointless.

For reprint and licensing requests for this article, click here.
Accounting standards Financial reporting IFRS FASB