Mr. Locke wrote an op-ed (“Don’t Believe the Writedown Hype”) that appeared in the Wall Street Journal April 1, 2010.  At least the date of publication was appropriate.

He repeats the political dogma that the recently passed healthcare act will reduce the number of uninsured, it will invest $5 billion in a reinsurance program, it contains a number of reforms that will slow the rate of increase in health care costs, and it creates a board that will restrain Medicare costs.  Locke then asserts that these changes will benefit corporations as well as individuals.

While I believe these assertions exaggerate the benefits of the bill and ignore its dysfunctional components, for the sake of argument, let’s assume that Gary Locke is correct.  So what?  Any cost reductions will be accounted for in the future when the business enterprise actually enjoys cost reductions.  Accountants don’t dream of fewer expenses and then book them.  We wait for history to prove their validity and to correct any errors.

Locke then criticizes commentators for focusing on a “minor” provision in the legislation that increases health-care costs.  He then asserts without proof that the actual impact will be “quite modest.”  What puffery!

What motivated this discussion was various 8-Ks issued by corporate America.  On March 24, AT&T informed investors that it would take a charge of about $1 billion.  Specifically, it stated:

Included among the major provisions of the law is a change in the tax treatment of the Medicare Part D subsidy.  AT&T… intends to take a non-cash charge of approximately $1 billion in the first quarter of 2010 to reflect the impact of this change.  As a result of this legislation, including the additional tax burden, AT&T will be evaluating prospective changes to the active and retiree health care benefits offered by the company.

I find it interesting that Locke calls this a “minor” provision but AT&T calls it “major” because it involves an expense of $1 billion.  I guess it depends on one’s perspective.  To AT&T’s investors, $1 billion is probably significant as it reduces quarterly earnings by one-third.  But to the government which creates budget deficits of trillions of dollars per year, maybe $1 billion is immaterial.

I would think that the administration would applaud the honesty by AT&T’s managers.  FAS 106 specifies the accounting for other postemployment benefits (OPEBs), including their tax effects.  As this legislation removes a tax subsidy from corporations (I’ll leave it to others to debate the merits of this part of the bill), the firms do indeed incur higher healthcare costs.  And these costs are immediate and persistent.  (There also is interaction with FAS 109, accounting for deferred taxes, but that need not concern us.)

The investment community needs honesty and I hope the administration does too.  Accordingly, Mr. Locke should not be so critical of the immediate recognition of additional costs by corporations which are real and immediate and should be recognized in income statements.  And he should not be pushy for the recognition of cost reductions until they materialize—if they in fact materialize.

Other companies are also issuing 8-Ks and announcing similar writedowns:  Caterpillar, $100 million; Deere, $150 million; and Boeing, $150 million.   Some estimate that when all is said and done, such writedowns will amount to $15 billion or so.  Additionally, some corporations are doubtless considering whether to reduce the OPEBs they offer employees.  I would not characterize these effects as “quite modest.”

On March 26, Henry Waxman announced that he would require corporate executives to appear before his committee on April 21 to determine whether they are playing politics through these 8-Ks.   Unless Mr. Locke supports accounting lies, he too should make an appearance and explain to Mr. Waxman how investors and creditors appreciate more honesty and transparency in the accounting reports.  Of course, it is possible that some members of Congress would prefer accounting shenanigans if they don’t reveal some of the costs of the recently passed legislation.

[Author's Note: The Wall Street Journal announced that Rep. Waxman cancelled the hearings.  Interestingly, WSJ says Waxman retreated because the companies reporting the earnings hit due to the Obama health care bill are acting appropriately.]

Gary Locke admonishes readers to “look past the hype and the overheated rhetoric.”  I suggest he read his own sentence.  I also suggest he include investors and creditors in the business community, for without their capital, the business of America ceases to operate.  As Commerce Secretary, he should applaud the recent 8-Ks that managers are releasing.  The information is invaluable to investors and creditors.

This essay reflects the opinion of the author and not necessarily the opinion of The Pennsylvania State University.

Return to The Accounting Cycle

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. He is the co-author of a monograph, Fair Value Measurements: Valuation Principles and Auditing Techniques (with Mark Zyla, Managing Director, Acuitas, Inc.) published by BNA in 2007.