The Hindu Business Line : The GAAPing holes

AT A May 14, 2002, hearing of a House Financial Services subcommittee on the issue of `Corporate Accounting Practices: Is There a Credibility GAAP?,' lawmakers were briefed on a number of topics, including five areas in which generally accepted accounting principles (GAAP) fall short. Testimony on the five areas was provided by Mr Steven Wallman, a former Commissioner of the Securities and Exchange Commission (SEC) and a popular and highly-regarded thought leader within the accounting profession.

"More than half a dozen years ago," Mr Wallman recalls, "it was apparent that GAAP was beginning to fail, and materially so in important ways." But it took the current scandals to show just how outdated GAAP has become. Recapping a series of messages he delivered while a Commissioner in the mid-1990s, Mr Wallman outlined the five key shortfalls:

What is measured: GAAP does not adequately measure internally-generated intangibles and other drivers of wealth.

Who is measured: GAAP does not clearly define the boundaries of the reporting entity. Off-balance-sheet activities, derivatives, partnerships and various contractual arrangements have blurred the boundaries of the firm.

Timeliness of measurement: Quarterly reporting is too backward-looking. More forward-looking disclosures and reporting are needed, but much of that is viewed as anathema to accounting concepts.

Access to information: GAAP is the language of business. But it has become so esoteric and specialised with different dialects for different industries and circumstances that it is beyond the comprehension of lay and even professional investors. Asking a lay person to read a financial statement would be like asking him to interpret a foreign language he had never heard before.

How it is measured: Accounting requirements are often too rules-oriented. In setting the requirements, standard-setters are more concerned with being able to ensure that preparers complied with the rules than they are about whether the resulting financial statements really make sense. As a result of these shortcomings, Mr. Wallman said, "We have seen such entities as Standard & Poor's and others create their own form of pro forma statements" to view a company's financial position differently from GAAP.

Over time, Mr Wallman expects that technology will cure some of the issues, as the entire exercise of "taking disaggregated information and aggregating it so others can spend their careers attempting to disaggregate it" will go away. In the meantime, he says, GAAP must be revamped to address the five issues.

CEOs' guidelines

THE Business Roundtable, an elite association of 150 chief executive officers (CEOs) of leading corporations, has released guidelines to increase trust in US companies post-Enron. In a press release, the CEOs encouraged all US public companies to adhere to these guidelines, which address controversial topics, including revolving-door and whistle-blowing policies.

Key practices endorsed in the guidelines:

Employees should be given a way to alert management and the board to potential misconduct without fear of retribution.

Audit committees should recommend the selection and tenure of the outside auditor.

Audit committees should also oversee the company's policies with respect to changing the outside auditor, rotating the audit engagement team personnel or limiting the hiring of such personnel.

Corporate boards should ensure prompt disclosure of significant developments.

Stockholders should approve stock options and restricted stock plans in which directors or executive officers participate.

Companies should create and publish corporate governance principles so that everyone from employees to potential investors will understand the rules under which the company is operating.

A substantial majority of the board of directors should be comprised of directors who are independent in both fact and appearance.

Directors should be required to be independent in order to sit on the board committees that oversee the three functions central to effective governance — audit, corporate governance and compensation.

Directors should ensure the company has a management compensation structure that directly links the interests of management to the long-term interests of stockholders, which includes a mix of long- and short-term incentives.

The Chairman of the task force which developed the guidelines, Mr Franklin Raines, said that the task force debated the issue of whether firms should be urged to rotate their outside auditors every five years.

It decided the decision should be left to audit committees, but it is recommending that its members adopt a so-called "cooling off" period before hiring staff from an outside auditor into senior financial management positions.

IASB's new preface

THE International Accounting Standards Board (IASB) has issued its Preface to International Financial Reporting Standards — and kept with a principles-based approach.

Paragraphs will be set out in both bold and plain type in its standards, distinguishing between principles and rules. But both are to carry equal authority, the IASB said.

Critics had feared that the IASB would turn to the American style of a rules-based approach.

The Preface sets out the objectives and procedures for due process, reflecting the IASB's new structure, and explains the scope, authority and timing of application of IFRSs. These standards are designed to apply to the general purpose financial statements and other financial reporting of all profit-oriented entities.

The IASB Chairman, Sir David Tweedie, said: "The Preface provides a brief description of the purpose and function of the main structures of the new arrangements for setting global standards.

As such, it is a short but essential introduction to the context within which the Board will frame its standards."

Honesty first

AMERICAN students look to a firm's integrity and honesty before the salary on offer, according to a survey by AccountingWEB.com.

But many are concerned about finding a job after graduation, the study revealed — although three-quarters said that the Certified Public Accountant designation would be their choice of professional qualification. The survey, sponsored by Accountemps and the Texas Society of CPAs and the Association of Government Accountants, asked over 550 Beta Alpha Psi students their views on a future career. This group are the most sought after by American employers.

More than 70 per cent of respondents were "very inclined" to pursue a career in public accounting, versus 41 per cent in private industry and 11 per cent in government. And `reputation' and `culture' have overtaken salary and benefits as the main factors influencing their career decisions, perhaps an indication that Enron is having an impact on students' views of the profession.

Citing pressure, stress, personal sacrifice, liability issues, long hours and length of commitment to a firm, 48 per cent would rather not pursue partnership status. "The students who responded to our survey were very vocal and forthcoming about what appeals to them and what doesn't appeal to them," said Mr Michael Platt, president of AccountingWEB.com. Long-term commitment to an employer rules, but decreases as experience increases — 60 per cent of respondents hope to find a position and grow with a firm for the long-term, and nearly three out of four expect an equal commitment from their employer, but the numbers drop as work experience increases.

Males expect to earn more than females — the average starting salary expected by males is $43,769, while females expected salaries of about 4.5 per cent less.

(Source: AccountingWEB)

Send this article to Friends by E-Mail

Stories in this Section
Uncertain oil economy

Prepaying external debt: Quite necessary

Why India lags in wealth generation

The GAAPing holes

On the chopping block

Gulping guilt

Water privatisation -- Torrent of trouble

Food subsidies