Into this void comes David Mosso, former Vice-Chairman of FASB, who wrote “Early Warning and Quick Response: Accounting in the Twenty-First Century,” published by Emerald JAI. I recently read the book and found it both interesting and naïve.
He opens the book with an assault on current generally accepted accounting principles, and then confesses his role in their creation. This perplexes me. Given his role as a member of the FASB, he was in a position to do something about perceived problems. I haven’t bothered to read past standards to determine the frequency of his dissents or his speeches to see whether he railed against current GAAP, but I hope he did. I am tired of pusillanimous officials who later wish they had done more, and the confession does not substitute for what should have been.
Mosso advocates a wealth measurement model by which all assets and all liabilities are measured at their fair value; further, income would be equal to changes in the fair values of those assets and liabilities. He lists six principles and claims that if they were followed, the body of standards would be greatly simplified. Unfortunately, he asserts without proving anything.
While I favor fair value measurements, I prefer market prices (Levels I and II in the parlance of FAS 157) but do not favor manager-manipulated measurements (Level III measurements). Mosso makes a common mistake—he thinks we can trust managers to tell the truth. They don’t and they won’t unless compelled to by external forces.
I do appreciate and agree with his treatment of goodwill. It isn’t an asset, so let’s quite pretending it is.
With respect to standards setting, Mosso correctly identifies the major inhibitor—the FASB has the authority to create accounting standards but no power to enforce them. As such, this dog’s bark has force only to the extent that the SEC has the teeth to bite. Unfortunately, during the past decade, the SEC has revealed many cavities, chips, and lost fillings.
In addition, the FASB has a ridiculous due process model that involves 24 steps for preliminary views, exposure drafts, public hearings, written comments, and more. It is as if the FASB is asking managers and other dissidents to thwart its work. A much faster process would be welcome.
Mosso also is a true believer in principles-based accounting, but does not address the litigation risk that permeates such a system. Principles-based accounting will fall apart during its first decade of existence because the courts will chew it up and add lots of details.
I liked the title of the last chapter, “Wanted: A Few Good Leaders.” Mosso correctly identifies the weak leadership of the profession as contributing to the problems of the last decade with scandal after scandal. We need moral and courageous leaders—not enablers of corporate fraud.
Finally, Mosso’s references to Pacioli are peculiar. Pacioli never wrote an accounting theory; instead, he wrote a treatise about accounting mechanics—bookkeeping. This is seen, for example, by noting that Pacioli never uses the words “asset” or “liability”. Mosso claims that “Pacioli would be saddened to see what subsequent accountants have done to his elegantly simple rules.” I doubt it. I think Pacioli would be too bewildered by our world and would not understand today’s commerce. After all, nobody discussed special purpose entities in the fifteenth century.
The major difficulty with Mosso’s text is that it is naïve. He writes his discourse as if accounting works in a vacuum and is devoid of the pressures of powerful constituents and is unaffected by the context within which accounting operates. I appreciate his memoirs, but I think any serious book about accounting theory must acknowledge the following factors.
- Financial engineering is a reality and is here to stay. No accounting rule or principle will ever be designed that some Wall Street wannabe won’t crack. He or she will find some way around it. Accounting theorists must address what we should do given the existence of financial engineers.
- One significant advance will be the elimination of manager intent and greater bounds on manager-estimated numbers. If managers can fudge something, they will.
- Accounting standards setters can improve matters by realizing what auditors can and cannot do. As such, I would advocate principles or rules that can be audited; otherwise, there is no point to the rule.
