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The Crisis in Financial Reporting. Rick Antle Senior Associate Dean and Professor of Accounting Yale School of Management. Criticized Parties. Government regulators Standards’ setters (FASB & EITF) Management Boards of directors Accounting profession. Debacle.

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The Crisis in Financial Reporting

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The crisis in financial reporting

The Crisis in Financial Reporting

Rick Antle

Senior Associate Dean and Professor of Accounting

Yale School of Management

Criticized parties

Criticized Parties

  • Government regulators

  • Standards’ setters (FASB & EITF)

  • Management

  • Boards of directors

  • Accounting profession



  • A sudden, disastrous collapse, or defeat; a rout



  • A complete failure



  • Cessation of proper functioning or performance

The crisis in financial reporting

“I am not an accountant.”

Basis of financial reporting

Basis of Financial Reporting

  • Economic concepts

  • Accounting conventions

  • Institutional context

Accounting identity

Accounting Identity

Assets = Liabilities + Equity

Assets – Liabilities = Equity

How it works

How it Works

  • 0 – 0 = 0?

  • 5 – 3 = 2?


Building example

Building Example

  • Original cost: $6 million

  • Accumulated depreciation: $4 million

  • Sales price: $3 million

  • Does selling the building add to shareholders’ wealth?

I am not an accountant

I Am Not An Accountant

  • Professes confusion of the aspirations of accounting with the practical results of applying its conventions and techniques.

Standards setters

Standards’ Setters

  • FASB’s elaborate due process means:

    Details and loopholes are there becausesomeone wants them there.

  • Just look at the treatment of executive stock options.

Special purpose entity problem


Big Bank


(Interest rate?)

Special Purpose Entity - Problem





A special purpose entity. Will issue debt, construct the office building, and lease it to Risky Corp

Wants to borrow $100 to build an office building, which it will occupy

Special purpose entity consolidated

Risky Corp & Subsidiary



Lease Payments



Use of office building



Special Purpose Entity - Consolidated

Big Bank

Special purpose entity off balance sheet





Lease Payments



Use of office building



Big Bank

Special Purpose Entity - Off Balance Sheet

Outside investors

Loan guarantee

Dialog one

Dialog One

  • How about $0.1 of equity for Office Corp?

  • Not enough? How about $0.02?

  • Still not enough? Ok, you tell me, how much equity is enough?

Two choices

Two Choices

  • Don’t answer questions

  • Pick a cut-off number or a rule for determining a cut-off number

  • Pre-Enron, number was $3. Now I believe it is $10.

Not feasible to refuse to answer

Not Feasible to Refuse to Answer

  • Another dialog:

  • How about $100 of equity?

  • That will do it? Then how about $99?

  • That’s OK, too? Then how about $98?



  • Use of categories as a basis of aggregation is too handy to abandon.

  • Requires methods for assigning things to categories.

  • Creates the possibility of playing games to manipulate the classification.

Principles based standards

Principles-Based Standards

  • Some think less detailed rules are the answer.

  • I think not.

  • Rules for assigning things to categories fall somewhere in the following box:

Logical possibilities for classification rules

Logical Possibilities for Classification Rules

Accounting profession

Accounting Profession

During the recent past, however, the profession has not always lived up to its duties and responsibilities. …Because of the growing list of substandard audits, the profession is slowly losing its credibility…. We have seen too many recent instances of flawed accounting reports that simply have been chalked up to the overworked explanation that a certain amount of poor financial reporting is inevitable.

Judge Sporkin

Accounting profession1

Accounting Profession

We are not confronted with a liability crisis. We are instead confronted with an identity crisis. We don’t know for what, to whom, and the when of our responsibility.

Abraham Briloff

Profession s response

Profession’s Response

  • Tightened internal control of Big 4

  • Emergency response teams

  • Pro-active – before the Public Company Accounting Oversight Board requires changes

The crisis in financial reporting

You can’t regain credibility

by only doing things you are

required to do.

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