U.S. accounting standards setting is truly out of control. Despite the constant drumbeat from special interests — mostly analysts and retirement plans who demand ever-increasing complexity and sophistication in accounting standards — what we get in the form of new accounting pronouncements in this country is largely indecipherable geek-speak.
Examples? Read the definition of “derivative” in paragraphs 6-11 of FASB Statement 133. I defy any ordinary investor to explain these paragraphs. As an accounting professor, I am embarrassed to be associated with such atrocious nonsense. Incomprehensible standards like this serve only those who dedicate themselves to the study of accounting esoterica.
Hence this post: I don’t own it or control this process. If I did, I would fire every member of the FASB and start over with a group of people who look much more like Americans who do real business in the real world. Another viable alternative now being considered by the SEC: outsource accounting principles to the IASB, based in London. They have a much better grasp of reality than does the U.S. FASB.
Last week, the Cato Institute issued a Briefing Paper entitled “FASB: Making Financial Statements Mysterious,” by T.J. Rodgers, CEO of Cypress Semiconductor Corporation. It’s an excellent read. It highlights some of the most serious output anomalies and structural deficiencies of our system of accounting-standards setting.
Probably the single biggest weakness is the FASB’s structure and lack of acccountability to anyone but the club of a high-level accountants who have run it for several decades. Here are quick excerpts from Rodger’s Briefing:
FASB is a group of seven theoretical accountants based in Norwalk, Connecticut. Its website shows that no FASB member ever started or ran a successful business and that only one member has even held a senior position in a prominent public company other than an accounting firm. Yet, FASB mandates the Generally Accepted Accounting Principles that corporations must use to report to their shareholders. The Securities and Exchange Commission enforces FASB mandates with the threat of criminal prosecution. . . .
Our company’s 215 accountants and I live daily with indecipherable GAAP financial reports and draconian Sarbanes-Oxley mandates. I have become firmly convinced that we have given too much power to a board of seven accountants who have a tendency to regulate to death the wealth-creating companies that they themselves are incapable of creating— or even understanding. . . .
I could not agree more. The FASB’s origin and structure do not represent America, its economic leaders or its investors. We deserve better.
Read Rodgers’ Briefing here.