- Email: [email protected]
Waking up from the nightmare of political accounting
Critical Perspectives on Accounting (1998) 9, 531]532 Article ID: pa970262
WAKING UP FROM THE NIGHTMARE OF POLITICAL ACCOUNTING PAUL B. W. MILLER College of Business, University of Colorado at Colorado Springs, 1420 Austin Bluffs Parkway, Colorado Springs, CO 80933-7150, USA
While Owsen is frustrated by the lack of ethics among managers, the problem’s root is the failure to comprehend that the capital market doesn’t fall for misleading reports very often. If they could accept this concept, they could at least reduce the cost of capital with full and complete reporting, even if their ethics are irrevocably weak.
Q
1998 Academic Press
Owsen’s paper describes a connection that, to my knowledge, no-one else has seen. Specifically, he believes that corporate support for tort reform was traded for public accountants’ non-support for recognition of stock-based compensation expense. This suggestion is provocative because, if it is true, the politics would have reached a new height of silliness and fruitlessness. Specifically, the preparers’ fearful focus on public financial statements is rooted in the premise that the capital markets rely only on these statements in the process of establishing security prices. Managers seem to cling fervently to the belief that controlling the signals sent through this medium will give them control over their security prices as well as their tenure in their positions. Their auditors also seem to believe the same thing. Beyond any doubt, this premise is faulty. Security prices are the product of a complex processing of multiple signals from a variety of both public and private sources. Trying to protect managers’ positions by controlling FASB standards is not too different from trying to protect a home from a flood by piling sandbags along the front of the lot while leaving the back and sides exposed. When the water rises, it might not come in the front, but the house will surely be flooded. In the same way, the absence of relevant information in the financial statements will not keep the markets from getting it somewhere else. Email: [email protected]
Received 3 June 1996; accepted 20 August 1997.
531 1045-2354/ 98 / 050531+ 02 $30.00 / 0
Q 1998
Academic Press
532
P. B. W. Miller
The rub is that forcing the markets to use non-public and less reliable sources inevitably increases the cost of capital and decreases security prices. Furthermore, the managers’ efforts to avoid accountability creates more risk for investors, with the consequence of even lower prices and higher capital costs. The character in Owsen’s nightmare keeps saying that ‘‘ this is war’’, and this attitude does characterize the attitudes of a great many in the preparer community. While I can’t deny them the right to feel this way, I will strongly assert that it does not have to be war. Instead, managers’ interests are best served when they have cooperative and open communications with their stockholders, the public, and especially their auditors. What good does it do to fight for something deviously when it can be earned honestly and more efficiently by telling the truth? Nonetheless, we do see managers hiring very expensive consultants to package news to produce pretty pictures instead of useful information. The epitome of the silliness was the Financial Accounting Foundation’s hiring of Kekst & Co. to ‘‘protect’’ the FASB’s independence from government influence. FAF chairman Mike Cook and his colleagues seemed to think that they could make a spin move on SEC chairman Arthur Levitt and avoid losing their control over the process. They were wrong, and that wasn’t the first time. Regrettably, it won’t be the last time, either. The solution to the problem does not lie in passing more regulations or pining for another day when accountants were more ethical. Instead, the solution is to be found in educating managers, auditors, standard setters, and securities regulators about the capital markets and how they work. Then they can go to work to change the system from the inside. The eventual outcome will be more honesty and a lower cost of capital, and we will have gotten there without creating another accounting or auditing standard, and without the despicable political behavior that is coming to be so ordinary in accounting. It is despicable because it is anathematic to our social role of providing useful information. I hope that we can all wake up from this nightmare.
WAKING UP FROM THE NIGHTMARE OF POLITICAL ACCOUNTING PAUL B. W. MILLER College of Business, University of Colorado at Colorado Springs, 1420 Austin Bluffs Parkway, Colorado Springs, CO 80933-7150, USA
While Owsen is frustrated by the lack of ethics among managers, the problem’s root is the failure to comprehend that the capital market doesn’t fall for misleading reports very often. If they could accept this concept, they could at least reduce the cost of capital with full and complete reporting, even if their ethics are irrevocably weak.
Q
1998 Academic Press
Owsen’s paper describes a connection that, to my knowledge, no-one else has seen. Specifically, he believes that corporate support for tort reform was traded for public accountants’ non-support for recognition of stock-based compensation expense. This suggestion is provocative because, if it is true, the politics would have reached a new height of silliness and fruitlessness. Specifically, the preparers’ fearful focus on public financial statements is rooted in the premise that the capital markets rely only on these statements in the process of establishing security prices. Managers seem to cling fervently to the belief that controlling the signals sent through this medium will give them control over their security prices as well as their tenure in their positions. Their auditors also seem to believe the same thing. Beyond any doubt, this premise is faulty. Security prices are the product of a complex processing of multiple signals from a variety of both public and private sources. Trying to protect managers’ positions by controlling FASB standards is not too different from trying to protect a home from a flood by piling sandbags along the front of the lot while leaving the back and sides exposed. When the water rises, it might not come in the front, but the house will surely be flooded. In the same way, the absence of relevant information in the financial statements will not keep the markets from getting it somewhere else. Email: [email protected]
Received 3 June 1996; accepted 20 August 1997.
531 1045-2354/ 98 / 050531+ 02 $30.00 / 0
Q 1998
Academic Press
532
P. B. W. Miller
The rub is that forcing the markets to use non-public and less reliable sources inevitably increases the cost of capital and decreases security prices. Furthermore, the managers’ efforts to avoid accountability creates more risk for investors, with the consequence of even lower prices and higher capital costs. The character in Owsen’s nightmare keeps saying that ‘‘ this is war’’, and this attitude does characterize the attitudes of a great many in the preparer community. While I can’t deny them the right to feel this way, I will strongly assert that it does not have to be war. Instead, managers’ interests are best served when they have cooperative and open communications with their stockholders, the public, and especially their auditors. What good does it do to fight for something deviously when it can be earned honestly and more efficiently by telling the truth? Nonetheless, we do see managers hiring very expensive consultants to package news to produce pretty pictures instead of useful information. The epitome of the silliness was the Financial Accounting Foundation’s hiring of Kekst & Co. to ‘‘protect’’ the FASB’s independence from government influence. FAF chairman Mike Cook and his colleagues seemed to think that they could make a spin move on SEC chairman Arthur Levitt and avoid losing their control over the process. They were wrong, and that wasn’t the first time. Regrettably, it won’t be the last time, either. The solution to the problem does not lie in passing more regulations or pining for another day when accountants were more ethical. Instead, the solution is to be found in educating managers, auditors, standard setters, and securities regulators about the capital markets and how they work. Then they can go to work to change the system from the inside. The eventual outcome will be more honesty and a lower cost of capital, and we will have gotten there without creating another accounting or auditing standard, and without the despicable political behavior that is coming to be so ordinary in accounting. It is despicable because it is anathematic to our social role of providing useful information. I hope that we can all wake up from this nightmare.