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February 1, 2008 11:00 AM Age: 9 yrs

Accounting for Accountability

Category: Eleanor Bloxham, A/F Commentary & Opinion, CG Commentary & Opinion, AC RSS
Source:  Eleanor Bloxham

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Concerns have been raised by the changes in accounting rules and practices over the last couple of years which tend to make financial accounting less accountable. I have shared those concerns in my writings and speeches and with anyone who would listen. However, if the Financial Accounting Standards Board (FASB) moves forward on plans to have companies disaggregate their numbers more and include line items with greater detail, I think that will be a big step forward. We will all benefit from greater accountability in the numbers reported by corporations.

Today, even careful reading of the financial footnotes does not ensure a clean analysis of the company’s financial health or condition, as companies shift where they report items and don’t fully disclose the “kitchen sinks” that some line items actually contain.

More accountability in accounting -- where what is in the numbers being reported is made clear to all report users -- is essential to good financial analysis. More information -- in terms of detail within the statements -- could also help to remove the concentration on the bottom line, which can be misleading for investors and others as accounting rules bend and sway to the whims of the accounting regulators.

By disaggregating the numbers, perhaps the single-minded focus on “one number” in the corporate financial statements will change to a larger view of the many pieces, how these are moving and how volatile these pieces really are. Certainly, it will enable the ability to use the statements to address multiple questions – not just answer the simple question, what does GAAP say?

That will be important as “fair values” are coming on to the statements. And hopefully, it should help incite the realization that not all fair values are created equal. In a going concern, the current price for certain items which are regularly bought and sold may have meaning but for other parts of the corporate balance sheet those fluctuations may not have much meaning at all, save in times of liquidation or resale where different strategies will be employed.

Disaggregation is good -- and I hope FASB and IASB go far enough with it to correct some mis-impressions on the part of boards and shareholders today about financial statements, what they mean, and what statements can and cannot do (their purposes and their limits).

I also hope disaggregation will create a longer term mind-set on the part of boards and shareholders which is needed now if US companies are to remain competitive and innovative in the global economy.  We cannot afford narrow mindsets or narrow interests. In this time of economic recession, we cannot afford the attitude that “employees seeking to be viewed as a strategic partner at a time when very few employees are needed to run the business,” should save their own skin by promoting the view that “delaying capital expenditures, delaying research and development, and suggesting that advertising be cut” is in the company’s best interests. (See: CFO.com: Is Your Finance Job Recession-proof? January 23, 2008.) These approaches will only hurt our national competitiveness and long term future.

Disaggregation, if it can unlock the fixation on the bottom GAAP number and create better analysis with a longer view, will have done much to make US companies stronger, more attractive to US and global investors, with benefits for management and boards as well.  If they can achieve these ends, then those at FASB and IASB currently working on these issues can be viewed as real heroes as they work toward creating long term accountability and greater awareness.  All of us have a stake in the outcome of the trend toward greater disaggregation of the numbers.

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Note: FASB is the primary (US) accounting rules standards-setter, following “GAAP,” or Generally Accepted Accounting Practices.”  IASB is the International Accounting Standards Board, the standard-setter for rules in the EU and many other foreign countries. IFRS is the set of standards used by IASB – International Financial Reporting Standards.

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