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Standing at the Crossroads
STANDING AT THE CROSSROADS Peter R. Bible Today the accounting profession is standing at the crossroads. The corporate world recently closed two decades of unprecedented greed and corruption. As accountants, we presently find ourselves with an overly complex rules-based, mixed-attribute accounting model, the future of which could reside in the public sector. We will be faced with numerous problems as we attempt to converge U.S. standards with international accounting standards.
1. THE CROSSROADS Which road to take: fair value or historical cost, private sector or public sector, principle-based or rule-based standards, and convergence or nonconvergence with international standards setters?
2. PERSPECTIVE: THE DECADES TO THE 1980S AND 1990S Much of the history can be viewed as a succession of actions and reactions. Accordingly, to comprehend the forces at play as we entered the twenty-first century, it is useful to understand the decades of the 1980s and 1990s that in many ways spawned the corporate scandals and the dysfunctional accounting model that greeted us as we began a new century. I graduated from college in the spring of 1980, took the CPA exam, and began my professional career with the firm of Deloitte, Haskins & Sells in Research in Accounting Regulation, Volume 18, 295–302 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1052-0457/doi:10.1016/S1052-0457(05)18017-5
295
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Columbus, Ohio. At that time, the U.S. economy had weathered a sustained period of inflation; the Financial Accounting Standards Board (FASB) had issued 38 statements and four concept statements; the Emerging Issues Task Force (EITF) did not exist; the Dow was at 600; the yellow pages for attorneys were actually yellow and required only three pages; the prime rate was at 21 percent; and the United States and Russia had accumulated enough nuclear power to destroy each other several times over. I never thought then that I would view these as the ‘‘good old days.’’ During the course of the 1980s, the economy recovered, the Cold War came to an end, the securities markets flourished, and the FASB – including the EITF – set sail on an overload of rules-based fair-value standards. Something much more fundamentally wrong was emerging, however. In 1986, I went to Deloitte’s National office to work in accounting research for two years. During that time, I helped develop EITF 86-16 and 88-16 on accounting for leveraged buyouts. After this two-year assignment, I relocated to the New York practice office to continue working on mergers and acquisitions activity until that market collapsed in 1991 with the RJR Nabisco deal. From 1991 to 1994, I continued to work with Wall Street investment bankers on the development, pricing, and issuance of collateralized mortgage obligations. The transactions I worked on during this eight-year period became the subject of three movies and/or books: Wall Street, Barbarians at the Gate, and Liar’s Poker. If any of you have read these books or seen the movies, I can assure you that the excesses displayed were not exaggerated and, in fact, most were presented in the most favorable light possible. In 1988, Michael Douglas in his famous ‘‘greed is good’’ speech in Wall Street laid out for us to ponder the fact that during the 1980s something fundamentally wrong was emerging. We will have to leave the root causes of this newly found obsession with wealth and power to the sociologists and historians. One thing had become unfortunately clear: JFK’s rising tide was finding only certain yachts. Very few of the transactions that I worked on were done to benefit Main Street; to the contrary, they were done to enrich a select few, many times excessively. So the roaring 1980s came to a screeching halt. Ivan Boesky and Michael Milken were sent to jail by a young U.S. attorney for the Southern District of New York named Rudy Giuliani. Many of the corporate raiders and investment bankers sailed into the sunset. Unfortunately, their legacy of rampant misuse of insider information, obsession with wealth and power, and complete disregard for the U.S. securities laws would carry on. The
Standing at the Crossroads
297
FASB’s and the EITF’s onslaught of rules-based fair-value pronouncements would also, unfortunately, carry on. 2.1. Sustained Economic Expansion, Unprecedented Market Performance: Greed, Rationalization, and Entitlement The 1990s started as a period of reflection and reform, but would end in much the same manner as had the 1980s. In 1994, I was assigned to a special unit in the firm tasked with defending partners and clients who had strayed over the line in the 1980s. In this role, I also conducted independent investigations for audit committees of alleged accounting irregularities. I believe this work is now called forensic accounting. The two most memorable of these investigations involved publicly traded companies, which, at the time, were darlings of Wall Street. Both had grown exponentially through acquisitions accounted for by the purchase method. Both companies used purchase accounting to record what are now referred to as ‘‘cookie-jar’’ reserves that were subsequently released into income to create the illusion of profitability. One of these two companies liquidated in bankruptcy and the other survived and is now a household name. What struck me at the time is that while the FASB and the EITF were preceding down the path that fair-value accounting was the answer to corporate corruption, here were two companies that used the oldest of the fairvalue models to manipulate earnings. In 1995, after four years as a partner, I left the firm and joined corporate America, first at GTE and now at General Motors. Little did I realize that the real fun was just about to begin. Among other things, the decade of the 1990s was defined in large part by sustained economic expansion and unprecedented stock market performance. But the 1990s also sowed the seeds of the scandals that would follow, causing some to describe the decade, in hindsight, as a decade of greed, rationalization, and entitlement. What happened? On the base of a long-standing bull market, the Dow started to grow as if it were on steroids. Reaching 2,000 for the first time in the late 1980s, the Dow peaked at 11,700 in January 2000. By the late 1990s, investor participation in the capital markets had broadly expanded with almost half of the households in the United States owning stocks. The allure of the unlimited potential of technology and, more specifically, the Internet caused many of us to suspend judgment and common sense. Several of us threw money and careers at anything with dot.com at the end of
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its name. Fortunes were being made overnight by young kids emerging from garages and by financial brokers playing fast and loose with the market. The marketplace is a stern taskmaster, however, and the rules of the marketplace will always prevail. Sooner or later, dreams collide with harsh reality. Eventually, only real value that results in cash flow is rewarded. Those who took shortcuts were discovered, and they reaped what they had sowed. The dot.com bubble burst, the economy slowed, and the scandals emerged. The Dow lost 35 percent by July 2002. Depending on the asset mix, many investors lost one-third to two-thirds of their retirement accounts. 2.2. Reasons for the Dysfunctional Behavior Why did this happen? There have been numerous explanations and will be many more to answer this question. Ultimately, no matter what the surrounding climate, dysfunctional behavior during the 1990s and the scandals that followed can be traced to failures of the human condition more than financial manipulation or wizardry with numbers. In the 1990s, there existed in many people a sense of entitlement to wealth that seemed to be there for the taking, even it if meant bending the rules a bit. The supposedly smart but misguided move was to be aggressive and take risks on a future that would certainly bail out or cover up today’s manipulation. This was a time ripe for abuse. As stocks declined and the market correction continued, losses mounted, and improper practices within the capital markets were discovered. Horrendous stories emerging from Global Crossing, Enron, WorldCom, Health South, Tyco, Adelphia, Xerox, Rite-Aid, and many more rocked the marketplace. 2.3. Results of the Climate in the 1990s What did we get? Congress stepped in with the Sarbanes–Oxley Act of 2002, and the Public Company Accounting Oversight Board was born. The FASB, under harsh criticism, issued FIN 45, FIN 46, and EITF 01-08, three of the worst accounting standards ever issued. The New York Stock Exchange weighed in with its own set of corporate governance standards, and the SEC issued a slew of new rules. We lost both a major accounting firm and the AICPA’s ability to set auditing standards. Ultimately, the legacy of the 1990s was a period of euphoric economic optimism combined with a crisis in the human condition resulting in corporate scandals that rocked the marketplace and changed how we do business forever.
Standing at the Crossroads
299
3. AGAIN AT THE CROSSROADS So now we are back at the crossroads. Which road do we take? Without the benefit of time travel, we have only history to guide us down the appropriate path. 3.1. Standards Setting: Private or Public Sector? Let us start with the easy issue: private versus public sector standards setting. Unlike others in the preparer community, I do not believe that the FASB has been a failure. I believe that the FASB has advanced the accounting model to the benefit of the markets and the economy. The FASB allowed itself to be unduly influenced, however, by those who believe that fair value is the answer to all ills including those of the human condition. Proponents of fair value claim that it is a more relevant concept than others, but have yet to articulate why this is so. As a result, today’s preparers of financial statements must contend with a set of rules that preclude a thorough knowledge, are not easily translated for those responsible for operating the business, and produce financial statements that even the most sophisticated users cannot readily understand. In short, what we are left with is a model that I fear has lost its relevance. Standards setting, however, should be allowed to remain in the private sector. Some believe that this battle has already been lost and that the Financial Accounting Foundation will eventually be folded under the Securities and Exchange Commission. For this reason, I believe that it is important for the FAF to act quickly to revamp the way accounting standards are developed. For example, I find it interesting that the preparer community’s participation on the EITF has been limited so that it cannot block a consensus. On one occasion a member of the FASB told me that if Statement 133 had been issued earlier, the collapse of Enron could have been avoided. On another occasion, a different board member told me that we should not be allowed to apply Statement 106 to the Medicare reform passed in late 2003 because it will serve only to increase our year-end bonuses. One does not need to look much past the accounting for negative goodwill in Statement 141 or the accounting for exit activities in Statement 146 to realize that much of the modern hierarchy is based on the perceived need to counter abuses. This is not the framework on which an advanced society should be setting accounting standards.
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3.2. International Standards: Convergence or Nonconvergence? Let us look at the other easy issue: Convergence or nonconvergence with international standards setters. I have been very impressed by the members of the International Accounting Standards Board whom I have dealt with, and I believe that ultimately convergence is in the best interest of efficient global capital markets – but what is the hurry? After all, we are principally dealing with a continent whose individual members have been at war with each other for most of recorded history. Even Sir David’s home country has yet to join the European Union. I believe that the rush to converge was brought about unfortunately by the EU’s reaction to Sarbanes–Oxley. In the information systems world there is a movement toward what is called global common systems. Those of us who have pursued this strategy have found it to be a fool’s errand because customs, regulations, and governments are still very much based on the geographic rather than the marketplace paradigm. I think we are years away from local governments embracing world markets. Perhaps the lower cost labor pools in Eastern Europe, India, Korea, and China will help advance this paradigm shift. For now, however, short-term convergence, like global common systems, looks to be a fool’s errand. One does not need to look further than the attempt to converge on APB 23 to realize that we are moving too fast. 3.3. Basis of Standards? Now for the two more difficult issues: Should the profession be governed by rules-based or principle-based standards and historical cost versus fair-value based standards? These two issues are perhaps the most affected by the legacy of the 1980s and 1990s. A cold reality today is that those of us left standing have to reap what others have sowed. The Federal Bureau of Investigation, along with the SEC Enforcement Division and the Internal Revenue Service, are presently investigating 158 large-scale corporate fraud cases, 16 of which have losses in excess of $1 billion each. These agencies are opening two to six new corporate fraud cases a month and are presently handling more than 2,500 cases involving securities fraud. In 1998, 5 percent of financial fraud actions involved Fortune 500 companies; in 2003, 17 percent involved Fortune 500 companies. The downfall of both principle-based and fair-value based standards is that both required the use of judgments. Judgments in today’s world come with
Standing at the Crossroads
301
the harshest of 20-20 hindsight. Even NFL quarterbacks have an easier life. First, they make a lot more money, and second, they are subject to criticism only on Monday mornings – not for years of subpoenas and depositions. As much as I would like to go back to the days of the Accounting Principles Board, the legacies that we have inherited and the litigious country in which we live make principle-based standards, like the APB itself, a fond distant memory. Perhaps some day, with tort reform and a shift in the present human condition, we can return to the good old days and principle-based standards. Most fair-value accounting measurements are mathematical or market based and are only as relevant as the prevailing conditions at the time. Valuation experts and actuaries alike will tell you that their work is as much about the brush as it is about the pen. I want to contrast that statement with the illustration of a check written for $1,000, cashed for $1,000, and recorded as $1,000. Throughout all of humankind, this transaction will remain a $1,000 transaction. Historical cost is the most relevant measure, and it can be audited leaving nothing to doubt or to chance. Fair value does have its place – and to think that Statement 33 had it right! – in a footnote. My proposal for fair-value financial statements is to first take the current accounting literature and throw out Concept Statement 7 and all standards on which it was based. Next throw out Statement 133 and any other standard that requires market-based accounting subsequent to initial recognition except for, of course, lower of cost or market. Take the resulting financial statements and make them the primary financial statements. Take those financial statements, replace historical cost equity with the company’s market cap at the end of the reporting period, and record an asset or liability for the market’s perception of the company’s future earnings and dividend capacity. Take those financial statements and put them in a footnote – radical? Yes; doable – yes; auditable – yes; relevant – yes. After all, why pursue valuation theories for assets and liabilities when the equity markets value our companies for us every day?
4. AT THE CROSSROADS: EUGENE FLEGM’S PREDICTION In conclusion, I would like to pay tribute to Eugene Flegm, who held my position in the 1980s. In 1984, he wrote the book Accounting: How to Meet the Challenges of Relevance and Regulation? Much has changed in the United States and overseas since that book was published 20 years ago.
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PETER R. BIBLE
Significant economic, political, and social events; developments in the fields of medicine, science, and communications; and increased threats of terrorism have changed the way we live and how enterprises conduct business. In that book, Gene warned that y if the accounting profession cannot provide financial data that meets the challenges of high expectations, validity, relevancy, and objectivity, it will become an army of technicians filing detailed, specific reports with regulatory agencies pursuant to an ever rising tide of rules and regulations that will still not meet the need for objective relevant data.
Unfortunately, his warning was prophetic.
1. THE CROSSROADS Which road to take: fair value or historical cost, private sector or public sector, principle-based or rule-based standards, and convergence or nonconvergence with international standards setters?
2. PERSPECTIVE: THE DECADES TO THE 1980S AND 1990S Much of the history can be viewed as a succession of actions and reactions. Accordingly, to comprehend the forces at play as we entered the twenty-first century, it is useful to understand the decades of the 1980s and 1990s that in many ways spawned the corporate scandals and the dysfunctional accounting model that greeted us as we began a new century. I graduated from college in the spring of 1980, took the CPA exam, and began my professional career with the firm of Deloitte, Haskins & Sells in Research in Accounting Regulation, Volume 18, 295–302 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1052-0457/doi:10.1016/S1052-0457(05)18017-5
295
296
PETER R. BIBLE
Columbus, Ohio. At that time, the U.S. economy had weathered a sustained period of inflation; the Financial Accounting Standards Board (FASB) had issued 38 statements and four concept statements; the Emerging Issues Task Force (EITF) did not exist; the Dow was at 600; the yellow pages for attorneys were actually yellow and required only three pages; the prime rate was at 21 percent; and the United States and Russia had accumulated enough nuclear power to destroy each other several times over. I never thought then that I would view these as the ‘‘good old days.’’ During the course of the 1980s, the economy recovered, the Cold War came to an end, the securities markets flourished, and the FASB – including the EITF – set sail on an overload of rules-based fair-value standards. Something much more fundamentally wrong was emerging, however. In 1986, I went to Deloitte’s National office to work in accounting research for two years. During that time, I helped develop EITF 86-16 and 88-16 on accounting for leveraged buyouts. After this two-year assignment, I relocated to the New York practice office to continue working on mergers and acquisitions activity until that market collapsed in 1991 with the RJR Nabisco deal. From 1991 to 1994, I continued to work with Wall Street investment bankers on the development, pricing, and issuance of collateralized mortgage obligations. The transactions I worked on during this eight-year period became the subject of three movies and/or books: Wall Street, Barbarians at the Gate, and Liar’s Poker. If any of you have read these books or seen the movies, I can assure you that the excesses displayed were not exaggerated and, in fact, most were presented in the most favorable light possible. In 1988, Michael Douglas in his famous ‘‘greed is good’’ speech in Wall Street laid out for us to ponder the fact that during the 1980s something fundamentally wrong was emerging. We will have to leave the root causes of this newly found obsession with wealth and power to the sociologists and historians. One thing had become unfortunately clear: JFK’s rising tide was finding only certain yachts. Very few of the transactions that I worked on were done to benefit Main Street; to the contrary, they were done to enrich a select few, many times excessively. So the roaring 1980s came to a screeching halt. Ivan Boesky and Michael Milken were sent to jail by a young U.S. attorney for the Southern District of New York named Rudy Giuliani. Many of the corporate raiders and investment bankers sailed into the sunset. Unfortunately, their legacy of rampant misuse of insider information, obsession with wealth and power, and complete disregard for the U.S. securities laws would carry on. The
Standing at the Crossroads
297
FASB’s and the EITF’s onslaught of rules-based fair-value pronouncements would also, unfortunately, carry on. 2.1. Sustained Economic Expansion, Unprecedented Market Performance: Greed, Rationalization, and Entitlement The 1990s started as a period of reflection and reform, but would end in much the same manner as had the 1980s. In 1994, I was assigned to a special unit in the firm tasked with defending partners and clients who had strayed over the line in the 1980s. In this role, I also conducted independent investigations for audit committees of alleged accounting irregularities. I believe this work is now called forensic accounting. The two most memorable of these investigations involved publicly traded companies, which, at the time, were darlings of Wall Street. Both had grown exponentially through acquisitions accounted for by the purchase method. Both companies used purchase accounting to record what are now referred to as ‘‘cookie-jar’’ reserves that were subsequently released into income to create the illusion of profitability. One of these two companies liquidated in bankruptcy and the other survived and is now a household name. What struck me at the time is that while the FASB and the EITF were preceding down the path that fair-value accounting was the answer to corporate corruption, here were two companies that used the oldest of the fairvalue models to manipulate earnings. In 1995, after four years as a partner, I left the firm and joined corporate America, first at GTE and now at General Motors. Little did I realize that the real fun was just about to begin. Among other things, the decade of the 1990s was defined in large part by sustained economic expansion and unprecedented stock market performance. But the 1990s also sowed the seeds of the scandals that would follow, causing some to describe the decade, in hindsight, as a decade of greed, rationalization, and entitlement. What happened? On the base of a long-standing bull market, the Dow started to grow as if it were on steroids. Reaching 2,000 for the first time in the late 1980s, the Dow peaked at 11,700 in January 2000. By the late 1990s, investor participation in the capital markets had broadly expanded with almost half of the households in the United States owning stocks. The allure of the unlimited potential of technology and, more specifically, the Internet caused many of us to suspend judgment and common sense. Several of us threw money and careers at anything with dot.com at the end of
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PETER R. BIBLE
its name. Fortunes were being made overnight by young kids emerging from garages and by financial brokers playing fast and loose with the market. The marketplace is a stern taskmaster, however, and the rules of the marketplace will always prevail. Sooner or later, dreams collide with harsh reality. Eventually, only real value that results in cash flow is rewarded. Those who took shortcuts were discovered, and they reaped what they had sowed. The dot.com bubble burst, the economy slowed, and the scandals emerged. The Dow lost 35 percent by July 2002. Depending on the asset mix, many investors lost one-third to two-thirds of their retirement accounts. 2.2. Reasons for the Dysfunctional Behavior Why did this happen? There have been numerous explanations and will be many more to answer this question. Ultimately, no matter what the surrounding climate, dysfunctional behavior during the 1990s and the scandals that followed can be traced to failures of the human condition more than financial manipulation or wizardry with numbers. In the 1990s, there existed in many people a sense of entitlement to wealth that seemed to be there for the taking, even it if meant bending the rules a bit. The supposedly smart but misguided move was to be aggressive and take risks on a future that would certainly bail out or cover up today’s manipulation. This was a time ripe for abuse. As stocks declined and the market correction continued, losses mounted, and improper practices within the capital markets were discovered. Horrendous stories emerging from Global Crossing, Enron, WorldCom, Health South, Tyco, Adelphia, Xerox, Rite-Aid, and many more rocked the marketplace. 2.3. Results of the Climate in the 1990s What did we get? Congress stepped in with the Sarbanes–Oxley Act of 2002, and the Public Company Accounting Oversight Board was born. The FASB, under harsh criticism, issued FIN 45, FIN 46, and EITF 01-08, three of the worst accounting standards ever issued. The New York Stock Exchange weighed in with its own set of corporate governance standards, and the SEC issued a slew of new rules. We lost both a major accounting firm and the AICPA’s ability to set auditing standards. Ultimately, the legacy of the 1990s was a period of euphoric economic optimism combined with a crisis in the human condition resulting in corporate scandals that rocked the marketplace and changed how we do business forever.
Standing at the Crossroads
299
3. AGAIN AT THE CROSSROADS So now we are back at the crossroads. Which road do we take? Without the benefit of time travel, we have only history to guide us down the appropriate path. 3.1. Standards Setting: Private or Public Sector? Let us start with the easy issue: private versus public sector standards setting. Unlike others in the preparer community, I do not believe that the FASB has been a failure. I believe that the FASB has advanced the accounting model to the benefit of the markets and the economy. The FASB allowed itself to be unduly influenced, however, by those who believe that fair value is the answer to all ills including those of the human condition. Proponents of fair value claim that it is a more relevant concept than others, but have yet to articulate why this is so. As a result, today’s preparers of financial statements must contend with a set of rules that preclude a thorough knowledge, are not easily translated for those responsible for operating the business, and produce financial statements that even the most sophisticated users cannot readily understand. In short, what we are left with is a model that I fear has lost its relevance. Standards setting, however, should be allowed to remain in the private sector. Some believe that this battle has already been lost and that the Financial Accounting Foundation will eventually be folded under the Securities and Exchange Commission. For this reason, I believe that it is important for the FAF to act quickly to revamp the way accounting standards are developed. For example, I find it interesting that the preparer community’s participation on the EITF has been limited so that it cannot block a consensus. On one occasion a member of the FASB told me that if Statement 133 had been issued earlier, the collapse of Enron could have been avoided. On another occasion, a different board member told me that we should not be allowed to apply Statement 106 to the Medicare reform passed in late 2003 because it will serve only to increase our year-end bonuses. One does not need to look much past the accounting for negative goodwill in Statement 141 or the accounting for exit activities in Statement 146 to realize that much of the modern hierarchy is based on the perceived need to counter abuses. This is not the framework on which an advanced society should be setting accounting standards.
300
PETER R. BIBLE
3.2. International Standards: Convergence or Nonconvergence? Let us look at the other easy issue: Convergence or nonconvergence with international standards setters. I have been very impressed by the members of the International Accounting Standards Board whom I have dealt with, and I believe that ultimately convergence is in the best interest of efficient global capital markets – but what is the hurry? After all, we are principally dealing with a continent whose individual members have been at war with each other for most of recorded history. Even Sir David’s home country has yet to join the European Union. I believe that the rush to converge was brought about unfortunately by the EU’s reaction to Sarbanes–Oxley. In the information systems world there is a movement toward what is called global common systems. Those of us who have pursued this strategy have found it to be a fool’s errand because customs, regulations, and governments are still very much based on the geographic rather than the marketplace paradigm. I think we are years away from local governments embracing world markets. Perhaps the lower cost labor pools in Eastern Europe, India, Korea, and China will help advance this paradigm shift. For now, however, short-term convergence, like global common systems, looks to be a fool’s errand. One does not need to look further than the attempt to converge on APB 23 to realize that we are moving too fast. 3.3. Basis of Standards? Now for the two more difficult issues: Should the profession be governed by rules-based or principle-based standards and historical cost versus fair-value based standards? These two issues are perhaps the most affected by the legacy of the 1980s and 1990s. A cold reality today is that those of us left standing have to reap what others have sowed. The Federal Bureau of Investigation, along with the SEC Enforcement Division and the Internal Revenue Service, are presently investigating 158 large-scale corporate fraud cases, 16 of which have losses in excess of $1 billion each. These agencies are opening two to six new corporate fraud cases a month and are presently handling more than 2,500 cases involving securities fraud. In 1998, 5 percent of financial fraud actions involved Fortune 500 companies; in 2003, 17 percent involved Fortune 500 companies. The downfall of both principle-based and fair-value based standards is that both required the use of judgments. Judgments in today’s world come with
Standing at the Crossroads
301
the harshest of 20-20 hindsight. Even NFL quarterbacks have an easier life. First, they make a lot more money, and second, they are subject to criticism only on Monday mornings – not for years of subpoenas and depositions. As much as I would like to go back to the days of the Accounting Principles Board, the legacies that we have inherited and the litigious country in which we live make principle-based standards, like the APB itself, a fond distant memory. Perhaps some day, with tort reform and a shift in the present human condition, we can return to the good old days and principle-based standards. Most fair-value accounting measurements are mathematical or market based and are only as relevant as the prevailing conditions at the time. Valuation experts and actuaries alike will tell you that their work is as much about the brush as it is about the pen. I want to contrast that statement with the illustration of a check written for $1,000, cashed for $1,000, and recorded as $1,000. Throughout all of humankind, this transaction will remain a $1,000 transaction. Historical cost is the most relevant measure, and it can be audited leaving nothing to doubt or to chance. Fair value does have its place – and to think that Statement 33 had it right! – in a footnote. My proposal for fair-value financial statements is to first take the current accounting literature and throw out Concept Statement 7 and all standards on which it was based. Next throw out Statement 133 and any other standard that requires market-based accounting subsequent to initial recognition except for, of course, lower of cost or market. Take the resulting financial statements and make them the primary financial statements. Take those financial statements, replace historical cost equity with the company’s market cap at the end of the reporting period, and record an asset or liability for the market’s perception of the company’s future earnings and dividend capacity. Take those financial statements and put them in a footnote – radical? Yes; doable – yes; auditable – yes; relevant – yes. After all, why pursue valuation theories for assets and liabilities when the equity markets value our companies for us every day?
4. AT THE CROSSROADS: EUGENE FLEGM’S PREDICTION In conclusion, I would like to pay tribute to Eugene Flegm, who held my position in the 1980s. In 1984, he wrote the book Accounting: How to Meet the Challenges of Relevance and Regulation? Much has changed in the United States and overseas since that book was published 20 years ago.
302
PETER R. BIBLE
Significant economic, political, and social events; developments in the fields of medicine, science, and communications; and increased threats of terrorism have changed the way we live and how enterprises conduct business. In that book, Gene warned that y if the accounting profession cannot provide financial data that meets the challenges of high expectations, validity, relevancy, and objectivity, it will become an army of technicians filing detailed, specific reports with regulatory agencies pursuant to an ever rising tide of rules and regulations that will still not meet the need for objective relevant data.
Unfortunately, his warning was prophetic.