In his most recent column for the Accounting Cycle (September 2008), Ed Ketz, accounting professor at Penn State University, comments on the SEC advisory group: Final Report of the Advisory Committee on Improvements to Financial Reporting to the U.S. Securities and Exchange Commission (August 1, 2008) [ http://www.sec.gov/about/offices/oca/acifr/acifr-finalreport.pdf]. Ed’s complete column about it can be found at [http://accounting.smartpros.com/x63030.xml].
Ed is a throwback to an older age of accounting professors. Not necessarily a curmudgeon, which evokes images of ill-tempered and disagreeable, he certainly is “a crusty irascible cantankerous old person full of stubborn ideas”. Nor is he afraid to call a schmuck a schmuck. I like that.
Here is what Ed has to say about chapter one, financial statement complexity:
- The first chapter is moronic, as it maintains the myth that the central problem today is complexity. The committee begins with a sophomoric example dealing with the mixed use of fair value and historical cost accounting. While such usage might be a problem, at worst it deals with second-order concerns. The real problem is that corporations are distorting, exaggerating, massaging, and sometimes outright prevaricating about the values, whether they are fair values or historical costs.
Well said, Ed. Now, tell me what you think about understandability, clarity and transparency:
- What the committee is really saying is that every Karen, Lou, and Janet should be able to read financial reports, regardless of how well they know accounting and finance. This is just a variation of the complexity mantra, and is patently absurd. If the SEC insists that companies make reports readable to seemingly everybody, then firms will not have to report anything on special purpose entities, derivatives, foreign currency translations, pensions, or leases. Otherwise, the average schmuck won’t be able to read the financial statements!
OK. Now lay it all out for us, Ed. What do you really think about this committee? And, please, say it with flair:
- The committee misses the mark and misses it badly. Let’s reiterate the fundamental problem of financial information: it is the management teams who prepare defective, flawed instruments and then publishes them with the flair and patter of a magician. Until we can rein in the temptation of managers to consider the modern corporation as their personal piggy bank, we shall remain in trouble. You cannot fix a problem if you continue to misstate what it is. This is especially hurtful when the likes of Conrad Hewitt, who should know better, turns his head and refuses to examine the essence of financial reporting in the real world.
I read everything Ed Ketz writes. Although I don’t always agree with it, I usually agree with the way he says it.
Over and out – - David Albrecht
