Newsflash: a book on the FASB sucks
Sep. 25th, 2022 05:32 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
ivyficI have given up on a book.
The book is The FASB: The People, the Process, and the Politics by Paul B.W. Miller, Paul R. Bahnson, and Rodney J. Redding. This book is enraging. Yes, I understand that probably less than a thousand people have read this and most of them are students, but trust me. It’s been a long time since I wanted to throw a book at the wall.
(If you don’t know what the FASB is, it’s the Financial Accounting Standards Boards, that sets the rules of US GAAP (Generally Accepted Accounting Principles). They’re the body that sets accounting rules required to be used by all public companies in the US. …I’m a CPA if you didn’t already know that.)
This book was originally published in the eighties and updated through 2015. There’s a lot of valuable information here, about the history of the FASB and it’s unique and precarious political situation. The FASB has no official regulatory authority. The SEC has designated the FASB as making rules that the SEC will enforce for public companies, but the SEC can decide to override any of FASB’s rules—and has done so in the past. The SEC also creates its own standards, on top of FASB’s. The SEC and the FASB function on “mutual non-surprise.” Also, before the passing of SOX, the FASB was funded by donations from the companies it was making rules for. This puts it into a position of having to negotiate a number of conflicting interests.
The problem-- *sigh* The problem is the book was written by academics who have a very specific way they think accounting standards should be written. And therefore in every case where US GAAP doesn’t follow their pet theory, they attribute the difference to corruption and dishonesty. It’s not that accounting is an attempt to encapsulate everything businesses do into a set of rules that represents economic reality and there are a lot of places where the best way to do that are not clear and experienced accountants can have legitimate differences of opinion about how to write the rules. No. It’s just that people that disagree with the authors are dishonest liars. Seems legit.
Their pet theory? (I recognize this means nothing to non accountants.) It’s mark to market. Mark to market. You know, the thing that Enron was famous for doing?
A quick rundown of the theory here. There are a number of ways to assign values to something. There’s historical value—for example, if you have a building, you record it at what you paid to acquire the building. And there’s fair value—what you would make if you sold the building today. Even that’s an oversimplification; there are a lot of different ways to assign and calculate fair value. For some types of assets, fair value is easy. For example—cash is cash. Record at what the bank says you have. (Not going into currency conversions, that’s its own rabbit hole.) Accounts receivable—record at what the $ amount is that you are owed. Stocks? Whatever is the market says right now.
But what about a factory? What about a trademark? What about a business division? What about an NFT? What about capitalized prepublication expenses? What about goodwill? What about deferred tax assets? What about bespoke investment vehicles in your pension plan?
How you would determine fair value for something that doesn’t have an active market of equivalent assets is incredibly difficult and judgmental. People get masters in valuation. A lot of it—for a factory, for example—would be based on projections of future cash flows discounted to present value, which is just a giant wad of management’s judgments. The number of specialists you have to bring in when you’re doing one of these evaluations is enormous.
This is how the authors address this complexity:
"Another frequent complaint is that market values cannot be reliably measured with today’s measurement techniques, and that auditors are incapable of auditing them. We find these complaints far too glib because, for example, it’s long been part of accounting for business combinations to measure and audit the market values of every imaginable asset and liability of the acquired company. … Furthermore, companies must test virtually every asset from inventory to goodwill for impairment below book value by looking for evidence that its market value has declined. In other words, generally accepted techniques for measuring and auditing market values are already widely in use. Thus, this complaint is simply not valid."
Okay, so number one—when a business combination occurs, yeah, you fair value every damn thing. Which involves boatloads of consultants and millions of dollars and remains highly judgmental. You do this because the acquiring company needed to figure out what to pay for the target in the first place, so it’s worth it to spend a whole lot of money estimating fair value of every jot and tittle. It makes no sense to go through that expense every year for every business for everything on their balance sheet.
And the impairment argument? There’s a judgmental screen—in other words, you first look for impairment indicators. Like, your business has declined, macroeconomic factors, or like, your factory burned down, or you closed all your stores because of COVID. It’s only if you think there are indicators that you go down the road of the more involved, more judgmental, more expensive process of putting a specific dollar price on fair value. So for most companies most of the time they ARE NOT CALCULATING FAIR VALUE to test for impairment, they’re just saying fair value is more than the book value.
Also, could you be more dismissive? Jesus fucking christ. How do you let me know you’ve been an academic your whole career without telling me you’ve been an academic your whole career.
Every one of their opinions is presented just as infuriatingly. There is no nuance here, no, we recognize there are differences of opinions but we the authors come down on this side for this reason. Everything is sarcastic italics and quotation marks:
"[U]sers who want to know the truth would not like a simple uniform rule to always expense or capitalize expenditures but would prefer that only the real values of real assets be capitalized and that only real expenses be reported on income statements. Of course, it would be very useful if managers provided adequate disclosures about the events and conditions that help users make appropriate assessments of future cash flows, regardless of their decision to capitalize or expense."
So, what’s the “real” value then? Oh, it’s what you think it is? You think there’s an objective accounting reality in Plato’s fucking cave and people not using it are liars?
"We have italicized “reported” and “apparent” in this paragraph to emphasize that real income assets, debt, equity, and earnings are what they are no matter what the statements present. Under the QFR paradigm [their pet theory and not actually a US GAAP concept] that reveals substantive economic rewards for transparent reporting, the seemingly favorable reported results sought by managers under their existing paradigm are not advantageous because they’re widely known to misrepresent reality, thus causing users to take steps to find private information they can use to validate (or contradict) management’s representations."
Citation fucking needed. They keep saying that cost of capital would be lower and markets would be more efficient if managers weren’t lying with the numbers and auditors helping them and CITATION FUCKING NEEDED. The stock market is not a rational place. Changes in accounting standards do not have 1:1 correlations to cost of capital. You think lack of transparent information means no money would flow into something? Crypto says you’re wrong.
In conclusion, I read 200 of the 250 pages. The last 50 are on “the future of the FASB,” in other words just the authors’ opinions and I can’t do it. I can’t keep going. I can’t keep reading a book that is telling me and every professional I’ve worked with that we’re all self-interested liars.
Die in a fire, Miller, Bahnson and Redding.
The book is The FASB: The People, the Process, and the Politics by Paul B.W. Miller, Paul R. Bahnson, and Rodney J. Redding. This book is enraging. Yes, I understand that probably less than a thousand people have read this and most of them are students, but trust me. It’s been a long time since I wanted to throw a book at the wall.
(If you don’t know what the FASB is, it’s the Financial Accounting Standards Boards, that sets the rules of US GAAP (Generally Accepted Accounting Principles). They’re the body that sets accounting rules required to be used by all public companies in the US. …I’m a CPA if you didn’t already know that.)
This book was originally published in the eighties and updated through 2015. There’s a lot of valuable information here, about the history of the FASB and it’s unique and precarious political situation. The FASB has no official regulatory authority. The SEC has designated the FASB as making rules that the SEC will enforce for public companies, but the SEC can decide to override any of FASB’s rules—and has done so in the past. The SEC also creates its own standards, on top of FASB’s. The SEC and the FASB function on “mutual non-surprise.” Also, before the passing of SOX, the FASB was funded by donations from the companies it was making rules for. This puts it into a position of having to negotiate a number of conflicting interests.
The problem-- *sigh* The problem is the book was written by academics who have a very specific way they think accounting standards should be written. And therefore in every case where US GAAP doesn’t follow their pet theory, they attribute the difference to corruption and dishonesty. It’s not that accounting is an attempt to encapsulate everything businesses do into a set of rules that represents economic reality and there are a lot of places where the best way to do that are not clear and experienced accountants can have legitimate differences of opinion about how to write the rules. No. It’s just that people that disagree with the authors are dishonest liars. Seems legit.
Their pet theory? (I recognize this means nothing to non accountants.) It’s mark to market. Mark to market. You know, the thing that Enron was famous for doing?
A quick rundown of the theory here. There are a number of ways to assign values to something. There’s historical value—for example, if you have a building, you record it at what you paid to acquire the building. And there’s fair value—what you would make if you sold the building today. Even that’s an oversimplification; there are a lot of different ways to assign and calculate fair value. For some types of assets, fair value is easy. For example—cash is cash. Record at what the bank says you have. (Not going into currency conversions, that’s its own rabbit hole.) Accounts receivable—record at what the $ amount is that you are owed. Stocks? Whatever is the market says right now.
But what about a factory? What about a trademark? What about a business division? What about an NFT? What about capitalized prepublication expenses? What about goodwill? What about deferred tax assets? What about bespoke investment vehicles in your pension plan?
How you would determine fair value for something that doesn’t have an active market of equivalent assets is incredibly difficult and judgmental. People get masters in valuation. A lot of it—for a factory, for example—would be based on projections of future cash flows discounted to present value, which is just a giant wad of management’s judgments. The number of specialists you have to bring in when you’re doing one of these evaluations is enormous.
This is how the authors address this complexity:
"Another frequent complaint is that market values cannot be reliably measured with today’s measurement techniques, and that auditors are incapable of auditing them. We find these complaints far too glib because, for example, it’s long been part of accounting for business combinations to measure and audit the market values of every imaginable asset and liability of the acquired company. … Furthermore, companies must test virtually every asset from inventory to goodwill for impairment below book value by looking for evidence that its market value has declined. In other words, generally accepted techniques for measuring and auditing market values are already widely in use. Thus, this complaint is simply not valid."
Okay, so number one—when a business combination occurs, yeah, you fair value every damn thing. Which involves boatloads of consultants and millions of dollars and remains highly judgmental. You do this because the acquiring company needed to figure out what to pay for the target in the first place, so it’s worth it to spend a whole lot of money estimating fair value of every jot and tittle. It makes no sense to go through that expense every year for every business for everything on their balance sheet.
And the impairment argument? There’s a judgmental screen—in other words, you first look for impairment indicators. Like, your business has declined, macroeconomic factors, or like, your factory burned down, or you closed all your stores because of COVID. It’s only if you think there are indicators that you go down the road of the more involved, more judgmental, more expensive process of putting a specific dollar price on fair value. So for most companies most of the time they ARE NOT CALCULATING FAIR VALUE to test for impairment, they’re just saying fair value is more than the book value.
Also, could you be more dismissive? Jesus fucking christ. How do you let me know you’ve been an academic your whole career without telling me you’ve been an academic your whole career.
Every one of their opinions is presented just as infuriatingly. There is no nuance here, no, we recognize there are differences of opinions but we the authors come down on this side for this reason. Everything is sarcastic italics and quotation marks:
"[U]sers who want to know the truth would not like a simple uniform rule to always expense or capitalize expenditures but would prefer that only the real values of real assets be capitalized and that only real expenses be reported on income statements. Of course, it would be very useful if managers provided adequate disclosures about the events and conditions that help users make appropriate assessments of future cash flows, regardless of their decision to capitalize or expense."
So, what’s the “real” value then? Oh, it’s what you think it is? You think there’s an objective accounting reality in Plato’s fucking cave and people not using it are liars?
"We have italicized “reported” and “apparent” in this paragraph to emphasize that real income assets, debt, equity, and earnings are what they are no matter what the statements present. Under the QFR paradigm [their pet theory and not actually a US GAAP concept] that reveals substantive economic rewards for transparent reporting, the seemingly favorable reported results sought by managers under their existing paradigm are not advantageous because they’re widely known to misrepresent reality, thus causing users to take steps to find private information they can use to validate (or contradict) management’s representations."
Citation fucking needed. They keep saying that cost of capital would be lower and markets would be more efficient if managers weren’t lying with the numbers and auditors helping them and CITATION FUCKING NEEDED. The stock market is not a rational place. Changes in accounting standards do not have 1:1 correlations to cost of capital. You think lack of transparent information means no money would flow into something? Crypto says you’re wrong.
In conclusion, I read 200 of the 250 pages. The last 50 are on “the future of the FASB,” in other words just the authors’ opinions and I can’t do it. I can’t keep going. I can’t keep reading a book that is telling me and every professional I’ve worked with that we’re all self-interested liars.
Die in a fire, Miller, Bahnson and Redding.
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Date: 2022-09-28 01:27 am (UTC)