IBM, for example, recently announced that it would put a freeze on its pension plan. Motorola, Sears, and Verizon are a few other corporations that have squelched their pension arrangements.

Government and quasi-government agencies have also felt the pinch. For example, the pension issue was a major stumbling block over the contract negotiations between the Metropolitan Transportation Authority and the workers' union. The union fought back by voting to strike. What will the union members do in a few years when the Metropolitan Transportation Authority runs out of money?

In the News: Ketz vs. Cox Dr. Ketz's editorial, which appeared here in December, resulted in a caricature by The Hindu Business Line of Dr. Ketz arguing with SEC Chairman Christopher Cox, with AICPA conference-goers looking on. Take a moment to check it out!

School districts and other state employees have their disputes with legislators and governing bureaucracies, and such conflicts likely will increase in the near future. The "Governator" even tried to convert California's defined benefit plans into defined contribution plans. Voters turned the governor down, but California will certainly face a major fiscal crisis in the next decade because of that ballot.

The U.S. government faces a similar problem with Social Security. As Social Security is built on Santa Claus promises, it too will face a crisis of gargantuan proportions in the near future. There is little or no hope for a resolution as Democrats refuse to study the facts and pretend there is no predicament, while Republicans admit the dilemma but attempt to solve the crisis by lining the pockets of their Wall Street handlers. Let's hope inflation doesn't rear its ugly head too much when the government really starts printing money.

As I view this landscape, I wonder whether we would have had these troubles if accounting regulators had enough backbone and produced some economically sound rules on pension accounting. The old Accounting Principles Board had its own rules, but they were toothless if not mouthless. In 1985 the Financial Accounting Standards Board issued Statement No. 87, the current body of rules on pension accounting. While an improvement over previous rules, they still lacked incisors and bicuspids and most molars.

In Statement No. 87, FASB invented the corridor rule to decide what gains and losses could be hidden from the income statement and what had to be reported. The unreported gains and losses would remain unrecognized rather than properly included in the income statements. FASB fabricated the notion of an intangible pension asset only because it had a dangling credit and wanted to keep debits equal to credits. This ridiculous solution reveals the unprincipled nature of this standard, for this intangible pension asset clearly is not an intangible asset.

The lack of any worthwhile standard until 1985 (and only a weak standard since then) prompted managers to make some very bad decisions. Over the last several decades, business enterprises and governmental concerns have made incredible assurances with respect to retirement policies, but these promises and guarantees could not be kept.

Why did managers make these foolish decisions? Did they know the consequences but not care? Did they understand the consequences but bequeath the crisis to their successors? Or did they believe the financial accounting numbers and not perceive the economic realities that would escape from Pandora's box?

My vote is on the last hypothesis. Some managers did not fully comprehend the consequences of their actions and so believed (erroneously) that the business enterprise would have no difficulty in paying the pension obligation as it came due. Other managers had an inkling, if not a good understanding, of the pension arrangement, but over time came to believe the financial statements. If the income statement and the balance sheet said things were good, well, they had to be good. We have thus listened to the Pension Sirens and have entered a trance. Unfortunately, our ship is near the shoals of economic reality.

All of these activities occurred because FASB makes rules with an eye to the political winds of the day. The influence of corporate America has virtually bankrupted the accounting process. FASB needs to quit hearkening to the selfish ambitions of CEOs and publish standards that accord with economic facts. Until then, those who believe FASB-based numbers will have to suffer the outcomes.

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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.