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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

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
debacle
Debacle
  • A sudden, disastrous collapse, or defeat; a rout
fiasco
Fiasco
  • A complete failure
failure
Failure
  • Cessation of proper functioning or performance
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?
  • RECOGNITION CRITERIA!!
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

Loan

Big Bank

Payments

(Interest rate?)

Special Purpose Entity - Problem

Risky

Corp

Office

Corp

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

Risky

Corp

Lease Payments

Office

Corp

Use of office building

Payments

Loan

Special Purpose Entity - Consolidated

Big Bank

special purpose entity off balance sheet

Equity

Dividends

Risky

Corp

Lease Payments

Office

Corp

Use of office building

Payments

Loan

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?
categorizations
Categorizations
  • 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:
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
slide26

You can’t regain credibility

by only doing things you are

required to do.

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