The Status-Quo CPA, Part II

Paul Miller and Paul Bahnson did it again in their regular article series “The Spirit of Accounting,” in Accounting Today. I wrote previously about their Sept 8-21, 2008 article, “The perils of clinging to the status quo—Part 1.”

In the September 22-October 5 issue, they are back with Part II of their response to the status-quo CPA, “Tom,” who is defending the increasingly irrelevant historical GAAP financial statements.

They slaughter more sacred cows in this article, such as comparability—the argument that GAAP produces consistent and comparable financial statements. This, of course, is nonsense. What it actually produces is a mindless adherence to principles that produce results valuable to no one.

As they say, GAAP never asks the auditor to question if the financial statements are useful for making decisions; they only ask if they comply with GAAP.

This point especially resonates to those of who understand GAAP is increasingly outdated for a knowledge economy:

Tom and the many who agree with him miss the point that the whole purpose for accounting is to provide useful information that facilitates rational and productive economic and other kinds of analyses. Rather, they seem to think that accounting’s purpose is to help accountants do the same riskless things over and over again.

As Ed Kless taught me this last week, project management can sometimes suffer from the same problem. It becomes the ends, rather than a means to an end.

CPAs seem to be doing GAAP because they can, with a historical legacy to justify their decisions. But they are ignoring the fact that these principles are virtually worthless to users of financial information for making future economic decisions.

If all the profession wants to do is to be scribes with respect to the past, then perhaps they should be relegated to that role, while letting others enter the market of providing financial statement attestation to interested users, willing and able to pay for knowledge they value.

This path would be far more challenging and full of opportunity rather than to continue playing historians with lousy memories. Miller and Bahnson seem to agree:

Our suggestion to [Tom] and others like him is to channel their energy and talent into achieving progress, instead of trying to protect and preserve the deeply flawed status quo. They deserve a better purpose for their professional lives, specifically leading the way into the new paradigm. We have nothing but best wishes for them and high hopes that they can see the world in the same new light that we encountered ourselves only a short decade or so ago.

It is so rare to read such candor in the accounting mainstream media. Miller and Bahnson are fearless pioneers, willing to challenge the status quo. I only wish there were more like them.

To be fair, there is one other voice in the same issue of Accounting Today, Wanda Wallace. At least in this article, “Take back the professions!” she is arguing against the check-list mentality and outside regulation of the profession.

One of the hallmarks of being a profession is autonomy—Greek for “self governance.” The CPA profession is no longer self-governed, what with the alphabet soup of regulators looking over the profession’s shoulders.

Due to rent-seeking and what economists call “regulatory capture,” the profession for the most part doesn’t have a problem with this. Witness Grant Thornton CEO Ed Nusbaum comment with respect to PCAOB being found constitutional in a recent court ruling:

Personally I think it [would be] a mistake to do away with the PCAOB, he said. The PCAOB is painful at times. We don’t always agree with their comments. They’re tough. Sometimes they even bring firms up on charges. I think they’ll continue to be aggressive, so it’s not like we love them. But, on the other hand, you need some oversight. They seem to be doing a pretty good job at that, and I think it would be a mistake to get rid of them, because then there’s no regulator.

I don’t doubt he thinks that, since his firm has benefited mightily from regulatory revenue. Even absent that, there’s enormous proof that PCAOB and SOX has hurt the very investors it was designed to help.

What happened to our profession’s belief in free markets, competition and capitalism?

We seem to be willing to run to the nanny state, hat in hand, lobbying for regulations that increasingly decrease our liberty and freedom. All under the guise of protecting the investor class. How far we’ve drifted from the signers of the Declaration of Independence.

Want to protect investors? Open up markets to competition, including the auditing profession and establishment of GAAP. Let the market sort out what are the best processes.

We do this with everything else in our lives, why not the accounting profession?

There’s nothing sacred about a profession. They can and do die, especially when they no longer add value to those they are pledged to serve.

If “Tom” is representative of the thinking among the leadership of our profession, then we may very well be at the beginning of the end.

As Henry Ford said: “The man who is too set to change is dead already. The funeral is a mere detail.”

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