Cox succinctly states his thesis: "The need for greater clarity and transparency is obvious. The accounting scandals that our nation and the world have now mostly weathered were made possible in part by the sheer complexity of the rules. Criminal conduct could be concealed in a thicket of detail. Conformity to hundreds of technical rules became not a shield to protect investors, but a sword to be wielded against them." (Read the full speech.)

See also: Christopher Cox Doesn't Reside at Pooh Corner FASB's Efforts Toward Simplification Earnings Per Share: An Example of Principles-Based Accounting? Accounting Rules: Why Simpler Isn't Necessarily Better

With all due respect, Mr. Cox, you have revealed an incredible ignorance about the spate of accounting scandals. With the exception of Enron, the accounting scandals of the last decade were primarily carried out with relatively simple schemes.

Consider Sensormatic Electronics, for example. The managers manipulated their earnings numbers by turning back its computer clocks thereby modifying the date-stamping function. This caused sales made in one quarter to appear as if they occurred in an earlier period. In addition, the managers mischaracterized warehouse shipments and pretended that interim shipments with an FOB destination status were instead FOB shipping point. These schemes are simple, not complex.

Consider the accounting fraud at Waste Management. Waste Management goosed its bottom line by overstating asset lives and understating salvage values, which reduced depreciation charges. Waste Management did not write down declines in the value of its landfills and omitted writing off the costs of unproductive landfill development projects. These managers also improperly capitalized a variety of expenses and did not sufficiently estimate income taxes. Again, these are simple schemes that any accountant and any CPA should know; indeed, my intro-to-accounting students comprehend these frauds.

Consider the accounting fraud at Health Management. Managers overstated ending inventory. As any beginning student realizes, overstating ending inventory understates cost of goods sold and overstates net income. Paraphrasing Sherlock Holmes, this fraud is quite elementary.

Consider AOL, which improperly capitalized marketing expenses and got shot down by the SEC. Brazenly, AOL did it again, only to be chastised again. The fraud couldn’t be simpler.

Duke Energy, Dynegy, El Paso, and Reliant Energy created round-trip trades—simultaneously buying and selling the same resource. They then differentially accounted for the buying and the selling activities, artificially inflating either the revenues or the trading volumes or both. Complex? Only if you don’t know anything about accounting.

Global Crossing and Qwest Communications and many others in the telecom industry created so-called capacity swaps. They then misused APB Opinion 29 to recognize gains for these bartering transactions. Hard? Only if you don’t know the difference between bartering and borrowing.

Adelphia and WorldCom piggyback off of AOL’s experiences and improperly capitalize several billions of dollars of expenses. In addition, Bernie Ebbers, the CEO at WorldCom, "borrows" $400 million and doesn’t bother to book the loan. The Rigas family "borrows" $3 billion and omits its accounting. Complex? Not at all. Filled with hubris? Absolutely.

In addition to not knowing what he is talking about, Mr. Cox is less than transparent when discussing how he and the profession will make financial reporting simpler. All he says is that the FASB is working on it with the help of the SEC. That’s as clear as a San Francisco fog.

If Cox thinks that principles-based accounting will make financial reporting simpler, I wish he would say that. Then we could discuss the absurdity of that position, especially in a world with structured finance. Besides, principles-based accounting requires principled people for it to work because principles-based accounting will be easier to manipulate.

In short, the speech by Christopher Cox is most disappointing. He asserts that "the accounting scandals … were made possible in part by the sheer complexity of the rules." Nonsense. As I said in the preface to my book, Hidden Financial Risk, it was made possible by managers who exaggerated and abused accounting numbers until the reported numbers made them look good. Aiding and abetting this process of "earnings management" have been board directors who never asked serious questions, corporate lawyers who were eager to push the limits, stock brokers and investment bankers who did not care how they made a buck, financial analysts who worried little that they served as used-car salesmen for their investment banking firms, auditors who looked the other way, an impotent Financial Accounting Standards Board, an overextended Securities and Exchange Commission, and members of Congress who have tolerated almost anything for sufficiently large campaign contributions. Maybe "criminal conduct could be concealed in a thicket of detail," but generally it wasn’t. Instead, criminal conduct was concealed by avaricious participants in the market place. Complexity of accounting rules had little to do with it.

There may be a case for simpler accounting rules, but unfortunately the SEC chairman has not made it. His one and only argument in favor of that proposal is erroneous and shows his ignorance of accounting and financial reporting.  

See also: Herz Encourages Simpler Accounting: Again, Bah, Humbug!

*The American Institute of CPAs hosted its national conference in Washington, D.C., with representatives from the Securities and Exchange Commission and Public Company Accounting Oversight Board.

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J. EDWARD KETZ is accounting professor at The Pennsylvania State University. Dr. Ketz's teaching and research interests focus on financial accounting, accounting information systems, and accounting ethics. He is the author of Hidden Financial Risk, which explores the causes of recent accounting scandals. He also has edited Accounting Ethics, a four-volume set that explores ethical thought in accounting since the Great Depression and across several countries.