In 2017 my
Website was migrated to the clouds and reduced in size.
Hence some links below are broken.
Contact me at
rjensen@trinity.edu if you really need to file that is missing.
Accounting Professionalism – Do We Get It?
Dennis R. Beresford
Thanks for the very kind
introduction
However, it’s not quite as
good as the one that Ken Merchant gave when I spoke at the
He asked in advance for a
title and I came up with, “Your Keys to Success”
After talking about some of
my background, Ken apparently got a little flustered and said
“And now Denny Beresford is
going to speak to you about your keys to sex!”
My actual remarks were probably a bit of a let
down to the audience given that exciting introduction
So I’ll try not to create
such unrealistic expectations today
You may recall that two years ago Art Wyatt spoke
and titled his speech, “Accounting Professionalism – They Just Don’t Get It!”
Art had some constructive criticisms for public
accountants
I would like to build on Art’s comments by talking about the role that academics
can and should play in the profession
Thus, I call my talk, “Accounting Professionalism – Do We Get
It?”
This will include my thoughts on the role that academics can and should
play in improving the status quo
But I’d first like to set the stage by talking some about the current
state of financial accounting and reporting
As just one example, we no longer can expect that individual auditors
are expert in everything
For a large, multinational company’s audit, a firm may have to supplement
the audit engagement team with specialists on matters such as information
technology, valuation, and actuarial methods
Also, many of today’s overly complicated accounting rules call for
specialists much like those required in medicine
Thus, experts commonly supplement audit engagement teams on accounting
matters such as:
Stock options
Variable interest entities
Securitizations
Derivative financial instruments
Income taxes
International accounting
And many other financial reporting challenges
Accounting rules have become too complicated
Let me further illustrate the complexity problem by mentioning the
titles of a couple of recent EITF projects
“Determining Whether an Interest is a Variable Interest in a Potential
Variable Interest Entity”
If you think that one is a tongue twister and head scratcher, consider
this one
“The Accounting for the Conversion of an Instrument That Becomes
Convertible upon the Issuer’s Exercise of a Call Option That Otherwise Is Not
Convertible or Not Currently Convertible Based on a Contingency”
I bet you don’t teach that one in accounting 101!
Given issues like these it shouldn’t be a surprise that even the most
well-intentioned accountants have a hard time keeping up with and understanding
all of the changes from the FASB, AICPA, SEC, EITF, and IASB
Frankly, it’s hard for many of us to even keep up with all these
acronyms!
And some of the individual standards, such as those on derivatives and
variable interest entities, are almost impossible for professionals, let alone
lay people, to decipher
But do accounting rules truly need to be as complex as they have
become?
At some point one has to ask whether these complicated standards result
in useful information to the average reader of financial statements
After all, usefulness is one of the standard setters’ primary goals
Another problem these days is that public companies are subject to what
I’ll call quadruple jeopardy
They have to apply GAAP as best they can
But they are then subject to as many as four levels of possible
second-guessing of their judgments
First, the external auditors have to weigh in
Second, the SEC is now reviewing all public companies’ reports at least
once each three years
Third, the PCAOB will be looking at a sample of accounting firms’
audits and that could include a given company’s reports
Finally, the plaintiff’s bar is always looking for opportunities to
challenge accounting judgments
I suspect that all this second-guessing is what leads many companies
and auditors to ask for more detailed accounting rules
But we may have reached the point of diminishing returns
In response to the complexity and sheer volume of many current
accounting standards, some have suggested that we should evolve to broad
principles rather than detailed rules
Both the FASB and the SEC have expressed support for the general notion
of a principles-based approach to accounting standards
Of course, actually implementing such an approach is quite problematic
and would probably take many years
Also, we live in a world where corporations often seek such detailed
guidance in order to protect against later challenges by auditors, the SEC, or
law suits
And auditors also seek protection against those who would challenge
their work, including the new PCAOB inspections
Until such time that all parties to financial reporting practice are
willing to live with more subjectivity, a principles-based approach isn’t very
likely
Fair Value Accounting
To be clear, I’m not opposed in general to fair value accounting
It certainly makes sense for marketable securities, derivatives, and
probably at least some other financial instruments
But the challenge is that the fair value concept is being expanded to
many other assets and liabilities
For example:
Statement 143 on asset retirement obligations requires that these
liabilities be recorded initially at fair value rather than what the company
expects to incur
Statement 146 on exit or disposal activities calls for the fair value
of exit liabilities to be recorded, not the amount actually expected to be paid
And Interpretation 45 on guarantees says that a fair value must be
recorded even when the company doesn’t expect to have to make good on a
guarantee
Fair value is also key to projects on:
Business combination purchase procedures
And differentiating between liabilities and equity
The approach that the Board is using for what I would call operating
liabilities is particularly troubling to me
Let me use recent FASB Interpretation 47 on conditional asset
retirement obligations as an example
An illustration of this might be where a company owns and operates a
facility that has some asbestos contamination
The facility is safe and can be operated indefinitely but if the
company wanted to sell the property it would have to remediate that
contamination
The company doesn’t have any plans to sell the property or to fix the
asbestos problem
But the FASB calls for the company to estimate and record a fair value
liability
This would be based on what someone else would charge now to assume the
obligation to clean up the problem at some unspecified time in the future
The Board does admit that it might be hard to figure out what the fair
value would be in this case
And companies could omit the liability if they simply couldn’t make a
reasonable estimate
My suspicion is that it will almost never be possible to make
such a reasonable estimate
However, the nature of practice today is that the SEC would probably
expect companies to always be able to make an estimate
Admitting an inability to make such an estimate may be an indication of
a material weakness in internal control
An even more important question is, does it really
make sense to record a liability when the company believes that there is only a
remote chance it will ever have to be paid?
Think about how this line of reasoning might apply
to litigation
Presently, we record liabilities only when it’s
probable that a loss has been incurred and a reasonable estimate of the loss
can be made
So, if a company was sued for a billion dollars but
there was only a 1% chance that it would lose, nothing would be recorded
The fair value approach would seem to call for a
liability of $10 million in this case, based on 1% times a billion dollars
In addition to the questionable relevance of this I don’t know how
anyone would ever be able to reasonably determine the 1% likelihood I assumed
And what objective evidence can even the most diligent auditor obtain
to support a conclusion that 1% is the right answer rather than 2 or 3 or 4%?
Remember that each additional 1% adds another $10 million to the
supposed fair value in this case
It’s hard to imagine a more obvious opportunity for
unscrupulous executives to “manage earnings” through the manipulation of such
estimates
If the trend toward fair value accounting continues, you may have to
advise many of your students to become valuation specialists rather than
accountants!
What can academics do?
So much for my thoughts about the state of financial reporting
I used these mainly to set the stage for my suggestions to academics
about professional matters like these
I’ll get to my specific suggestions in just a minute
But first a few general comments based upon my personal journey from
public accounting, to the FASB, and now to the academic world
It’s no secret that the profession of accounting faces many obstacles
in utilizing the talents of scholars who obtain doctoral degrees in accounting
For one thing, there are too few of you to meet the demands of colleges
needing accounting teachers
In other fields such as economics there is a surplus of PhD’s that
become absorbed in industry and government
But it is relatively rare to find a PhD in accounting who makes a
career outside of academe
Contributions of accounting faculty to the profession tend to be
voluntary or indirect through the molding of students and through published
research
Our contributions to education of students have been excellent but
contributions of accounting research have been controversial to say the least
At last year’s annual meeting, Jane Mutchler commented on some of these
same matters through a series of questions
I’ve chosen to repeat four of Jane’s questions because they tie
directly to my views that I want to share with you in a minute
In slightly paraphrased form, those four questions from Jane were as
follows:
How many of us are having good, critical discussions about the state of
practice with the firms that recruit our students?
How many of us are writing articles that critically analyze the state
of the profession and practice issues for a journal like Accounting Horizons?
How many of us are conducting rigorous research that is focused first
on crucial practice issues and only secondarily on getting published in a top
journal?
And, how many of us are evaluating and revamping our courses to deal
with the realities of the world today?
Those are all great questions and I’d like to respond with several
specific suggestions as to how we can improve things
First, we should get involved in the standard setting processes by
commenting on proposals or writing about how we think accounting and auditing
should evolve
Second, even if we don’t get directly involved, we should stay
reasonably informed about current activities and use that knowledge in our
teaching
Third, we shouldn’t focus accounting education so much on memorizing
rules and mindlessly working objective problems
Instead, we should place much more emphasis on helping students develop
problem-solving skills
And, fourth, we should make our research as meaningful and relevant as
possible to standard setters, auditors, and business managers
Let me elaborate on each of those points in the rest of my remarks
Get involved
On my first point, I’ve written and spoken on several occasions about
the relative dearth of comments from academics on FASB projects
Backing those words, I’ve written several comment letters myself in the
past eight years
But the fact remains that too few academics communicate their thoughts
on important accounting projects, and that continues to be a disappointment
In fact, it isn’t clear whether many academics even bother obtaining
and reading the various proposals on accounting and auditing changes
The Financial Accounting Standards Committee of AAA does weigh in on
important projects, and their comments are quite thoughtful
I fully recognize the lack of academic reward for writing letters to
the FASB
However, if we want to be considered part of a profession, shouldn’t we
accept this task as one of our responsibilities?
And what group is better able to provide objective, impartial, and
informed input on the decision usefulness of proposed changes in financial
reporting standards?
I think we are guilty of “not getting it” if we leave this completely
to others
The FASB really needs good, clear thinking and analysis on its
projects, and with our training and experiences we can provide that valuable
input
As an educator, I’ve found that as a good rule of
thumb if you can’t defend a new accounting proposal to a reasonably intelligent
MBA accounting student, it may not be a good standard
With the ability to step back and take such a view, our sharing that
kind of analysis with the FASB might help in the simplification efforts now
underway
For example, whether you are for or against fair value accounting, it
would be great for you to weigh in on that important topic
Beyond formal comment letters, it’s even more disappointing to see so
little being written by academics on where financial reporting should be
heading
Many of you do write for the CPA Journal and similar publications, but
those articles are largely descriptive of what has already happened
Wouldn’t it be great if just 1% of AAA members engaged in
forward-looking and provocative writing on accounting issues?
By the way, I do congratulate those of you who participate directly in
various standard setting activities
For example, I was delighted to see the role that Bill Messier of
Bill was a member of a task force that provided implementation advice
on certain aspects of PCAOB Auditing Standard 2
Further, I’m delighted that a few accounting academics have crossed
over to leading roles in financial reporting and financial statement analysis
For example, Trevor Harris has moved from
And Howard Schilit started the very successful Center for Financial
Research & Analysis many years ago after an earlier career at
Another great example is Chuck Mulford of Georgia Tech who leads the
Financial Reporting & Analysis Lab at that University and is quoted
frequently in the business press
In addition, many of you participate actively in the AICPA, state and
local CPA societies, IMA, FEI, and similar organizations
That is a less direct way of contributing to new standards and so
forth, but it is a great way to stay informed, which is my next point
Stay informed
So my second suggestion is that we all should stay reasonably informed
about current professional developments and share that information with our
students
In my eight years in teaching I’ve concluded that way too many of us don’t
stay relatively up to date on professional issues
Most of us have some experience as an auditor, corporate accountant, or
in some similar type of work
That’s great, but things change quickly these days
In my case, when I first came into the profession computers weren’t in
wide spread use
And neither the FASB nor the APB were yet in being, so the accounting
rules were much simpler
In fact, one of my friends suggested that I’m so old that only debits
had been invented back then and not credits
I’m sure that for most of you your practice experience is much more
recent
However, what we did 20, 10, or even 5 years ago may not be fully
relevant today
And explaining to students how things work in practice based on that
out-of-date experience might be more harmful than helpful
There are many ways to stay up to date, but all of them require a
certain amount of effort
Probably the best piece of advice I’ve seen recently was pretty simple:
read more and sleep less!
These days it is incredible how much information is available at the
click of a mouse or computer key
For example, the FASB, SEC, and PCAOB all have excellent web sites that
are worth perusing on a regular basis
Also, extensive reports analyzing financial reporting and auditing
problems at WorldCom, Enron, and Fannie Mae are readily available on the Web
These and many other materials offer remarkable insights that will
increase our knowledge and allow us to make our classes as relevant as today’s
headlines
We live in interesting times
And our students should have the benefit of our expert analysis of what
is happening in the profession we are training them for
For example, the simple journal entries that allowed WorldCom to
overstate net income by $3.8 billion by capitalizing certain expenses are great
teaching tools for either an introductory or MBA accounting class
My friend Bob Jensen is a wonderful resource for all of the new
information on the Internet that may be relevant to academic accountants
Bob and some other professors have found that the Web is a more timely
and widely used medium for communication than published journal articles
Bob has been trying to ignite the open sharing spirit in academe and he
is constantly updating documents and tutorials of interest to practitioners as
well as professors and students
He gets as many or more questions and comments from practicing
accountants and security analysts as he gets from professors
How many of you share your own materials on the Web so that you are
helping the outside professional world in addition to your students and
research partners?
The way it usually works is that the more you share, the more you
receive
Unfortunately, most practitioners don’t read our academic journals
these days
Many practitioners do, however, participate in sharing arrangements
like the Accountants Education using Computers and Multimedia free listserv
Barry Rice of
In fact, AECM and similar sources distribute so much useful information
that I find most evenings and weekends filled with interesting reading
In addition to what you can get easily from the Web, many accounting
firms and other organizations have materials that they would love to give you
Unfortunately, some of the materials appear briefly in electronic form
and then disappear from sight
However, I suspect that better archiving will occur over time
Even the FASB is now engaged in a mammoth project to make all of the
official accounting literature researchable electronically
It will be a few years before that project is finished, but it will be
a tremendous asset to faculty and students when it is
Many accounting firms also are willing to invite you to local and even
national seminars on current developments
And there are increasing numbers of firm Web casts that are becoming
more and more effective
But not enough of us seem to take advantage of these learning
opportunities
I recognize that personal time is important and some may feel that some
of the things I mentioned cut into research productivity or other priorities
However, I would again observe that staying up to date is an essential
aspect of “getting it” as an accounting professional
It’s really not that hard to do, but it does require effort
My third suggestion is that we shouldn’t focus accounting education so
much on memorizing rules and mindlessly working objective problems
Instead, we should place much more emphasis on helping students develop
problem-solving skills
By their nature, accounting textbooks tend to be a couple of years out
of date with respect to new accounting rules
I don’t think that is necessarily a bad thing
The real trick, it seems to me, is to somehow instruct students in the basic
principles without having to deal with all the excruciating details
As noted earlier, today’s reality is that certain individuals in accounting
firms and corporations will become subject matter experts
All others will have to have enough of a general understanding to be
able to recognize that an issue exists and to know where and how to look for
help
That brings me to the role of research in the accounting curriculum
By that I don’t mean the research that many of you are doing to advance
the state of the art – I’ll get to that in a few minutes
Rather, I mean helping students develop the skills that allow them to
search for answers in the authoritative literature and elsewhere
I do some of this in my Masters of Accountancy class, but I’ve argued
for much more in our program
I believe that a full semester course could be devoted to this area, as
it will be a very important part of a new accountant’s skill set
This is being done at some schools and there are at least a few books
that will help you in creating your own course if you don’t have one
With ever expanding complexity, we must do more to help our
students learn how to use computer research tools more effectively
Through teaching a partially research oriented class for eight years
now, I’ve found that one of the hardest things for students to learn is what
terms to use in their searches
You would think that with Google, Yahoo, and similar tools so
ubiquitous this shouldn’t be a problem
But I’m reminded of a case I developed a few years ago where I asked
students to determine the proper accounting for CBS Television’s new contract
with the National Football League
One student came to me in frustration and said that he was having no
luck in his search efforts
He said, “I keep putting the key words ’NFL Football’ into the
accounting data base and don’t get any hits!”
In attending several teaching workshops at AAA conferences in the past,
I’ve often heard about the need to teach “critical thinking” skills
I absolutely agree with that and I think that using cases and asking
students to perform computer based research to solve them and write reports is
a great way of doing that
To the extent possible, all of us should replace lectures with cases
and simulations that contain real world challenges
For example, did you consider asking your students to listen to General
Electric’s conference call last May when it explained its restatement for
derivatives?
Adjusting our teaching to reflect the realities of the current work
environment is another way of “getting it” as accounting professionals
Making accounting research as relevant as possible
My fourth and final suggestion is that accounting research should be as
meaningful and relevant as possible
This is, of course, the research that many of you do to become
published in leading journals and earn tenure and promotion
Advancing the state of the art is certainly one of the hallmarks of a
professional and I commend, in particular, those who continue to be active
researchers for most of their career
Some of what is being done can be useful to standard setters as well as
accounting professionals in both the corporate and public accounting fields
Mark Nelson, Bob Libby, and Jim Hunton wrote one
recent paper that I thought was especially interesting
Their study concluded that auditors were much more likely to demand
that companies correct errors in recorded amounts vs. amounts disclosed
in footnotes
That supports the FASB’s long-standing contention that disclosures
aren’t an adequate substitute for proper accounting
The paper also suggested that the PCAOB should require that auditors
focus more on footnote disclosures
I was pleased to see that this study received good coverage in the
general business press, rather than only in academic circles
Another form of extremely valuable scholarship is the type of articles
that Steve Zeff has written for Accounting Horizons and elsewhere
As Jane Mutchler said last year, Steve does an outstanding job of
analyzing events that led to the point the profession is at today
His work is more like that of an investigative reporter but it also
represents rigorous and well-reasoned analysis of watershed events in
accounting
Several of his articles are required reading for my Masters of
Accountancy students
Unfortunately, too much of today’s accounting research is not as
relevant and practical as those I just cited
Most of what is published in the leading journals is very strong in
methodology but may not make as much of a contribution to the profession of
accounting
It is nice to see that recent issues of The Accounting Review resemble
a Sears catalogue in size
But it’s disappointing that Accounting Horizons seems to be doing a
vanishing act as it shrinks in size with almost each new issue
It would be great if accounting research could focus more on difficult
professional problems and not be so constrained by methods
I believe that standard setters and the accounting profession would
much rather have creative solutions than uninteresting findings emerging from
tight methodology
This
notion was mentioned in an August 2003 story in the New York Times magazine
about economist Steven Levitt, author of the current best seller,
“Freakonomics"
Another prominent economist said the following about Levitt
"He represents something that everyone thinks they will be when they go to
grad school in econ but usually they have the creative spark bored out of them by
endless math -- namely, a kind of intellectual detective trying to figure stuff
out"
I
hope it’s not too late to hope for more intellectual detectives in accounting
trying to solve some of the mysteries of the profession
On a related note, I can’t resist reading a few words from the author’s
notes to Michael Crichton’s 2004 novel, State of
He said:
If you read some authors who say, 'We find that anthropogenic greenhouse gases and sulphates have had a detectable influence on sea-level pressure' it sounds like they went into the world and measured something.
Actually, they just ran a simulation. They talk as if simulations were real-world data.
They're not. That's a problem that has to be fixed.
I favor a stamp: WARNING: COMPUTER SIMULATIONS - MAY BE ERRONEOUS AND UNVERIFIABLE.
Crichton went on to say:
We need more people working in the field, in the actual environment, and fewer people behind computer screens.
We need more scientists and many fewer lawyers.
Now I suspect that at least a few of you may agree that those notions relate to much of today’s accounting research
In fact, Professors Bennis and O’Toole from USC made very similar points in their excellent Harvard Business Review article in May
But I also suspect that others of you are probably upset by any suggested relationship between Crichton’s remarks and accounting research
At a minimum, I hope that my
comments make you think about this matter a little more and not just accept the
status quo
If nothing else, researchers can do a better job of communicating the
implications of their work
For example, how would you summarize your findings for an op ed piece
for the Wall Street Journal?
Research that provides a meaningful contribution to the profession of
accounting will help to show that we do indeed “get it”
So those are my comments on the state of the accounting profession,
particularly as it relates to financial reporting, and the roles that academics
do and should play
In summary, you are contributing a great deal to the accounting
profession, but you could do a lot more
When my Masters of Accountancy students ask me what they have to do to
succeed in both my class and their career, my advice is pretty simple
I say they need to
Show up
Keep up
And speak up
All of you are obviously showing up
And your presence at this session and your attentive listening to my
comments indicates your interest in keeping up
So I urge you to speak up – to not just accept things the way they are
but to help influence the way they should be
I certainly plan to continue to do my best to improve the
profession of accounting, and I hope that many of you will join me