Please ensure Javascript is enabled for purposes of website accessibility
November 21, 2022

Accounting News Roundup: Is Complying With GAAP Ethical? | 10.26.16

Ethics and GAAP

Here's a fun column from professors Paul Miller and Paul Bahnson that investigates "whether it’s ethical to comply with GAAP" based on The Four-Way Test. In order to pass the test, the answer to each of the four questions from the test — 1) Is it the truth? 2) Is it fair to all concerned? 3) Will it build good will and better friendships? 4) Will it be beneficial to all concerned? — must be "Yes."

I'll save you the suspense: They found that "all those involved in producing GAAP-compliant financial statements are acting unethically." Along the way, they address each of the questions, but it's set the stage question 1, citing nine specific examples of where GAAP falls short in "truth," starting with depreciation:

[D]epreciation costs have been expediently fabricated since the 1830s by relying on a dubious premise that all assets lose value, a questionable initial valuation based on capitalized costs instead of fair value, and three unverifiable predictions of future events. Therefore, those calculated numbers cannot provide relevant and reliable information about assets’ values on balance sheets or the actual income results of using them.

The truth question, for me, more or less settles it. Accounting principles are created through a flawed process influenced by people with political interests. It's been demonstrated time and again that rules are imperfect and sometimes straight-up bad at conveying the economic transactions of a business. Not to mention the fact that many accounting frauds are carried out under the guise of a clean audit opinion. Even "generally accepted" suggests that it's not accepted by everyone and therefore isn't the "truth" for everyone.

From there, it's easy for Miller and Bahnson to conclude that complying with GAAP is not fair to all nor is it beneficial. As for good will, the professors handled that beautifully:

[O]ur experience with financial analysts shows that they trust virtually no one who publishes GAAP reports because our consulting clients always pose this unfriendly question: “What are the managers and auditors trying to hide?” It also appears to us that auditors and their clients don’t trust each other very much. Further, we observe that hardly anyone trusts FASB, and that the Securities and Exchange Commission trusts nobody!

In the context of The Four-Way Test, it's an airtight case: complying with GAAP is unethical.

Fortunately for everyone, ethics are by their very nature, relative and don't exist in a vacuum. Since everyone has agreed to comply with GAAP to secure certain, special privileges (i.e. access to more money), complying with GAAP, despite its undeniable flaws, is considered ethical by the vast majority of people.

Can the vast majority of people be wrong? Sure! It happens all the time and you can argue that's the case here, but this is one of those situations where the majority tends to rule, so going contrarian could have some consequences.    

Has Donald Trump released his tax returns?

Nope! It's a desert out there for DJT tax returns news right now. But I figure a guy trying to tie the Clinton campaign to a quack who stood outside of Trump Tower demanding his tax returns is good enough for two days.

University partner viewpoint: CPA or CFA?

If you've struggled with which of these credentials to pursue, a University of Scranton post compares the benefits of the CPA and the CFA and even throws in some insights on the CMA for good measure.

Previously, on Going Concern…

I wrote about chief audit executives and Big 4 firms possibly getting stingy. In Open Items, someone wants to know what to expect at PwC Discover.

In other news:

Get the Accounting News Roundup in your inbox every weekday by signing up here.

Latest Accounting Jobs--Apply Now:

Have something to add to this story? Give us a shout by email, Twitter, or text/call the tipline at 202-505-8885. As always, all tips are anonymous.

Comments are closed.

Related articles

woman working on a laptop with a dog beside her

Monday Morning Accounting News Brief: The Leadership Void; KPMG Gets Fined (Again); PwC Ups Leave | 10.3.22

Deloitte launches Global Sustainability & Climate learning program that aims to enhance skills and capabilities of Deloitte people to help address a global societal challenge. Dubai’s financial regulator has provisionally fined KPMG and one of its former partners $2 million over the firm’s auditing of Abraaj, the emerging markets private equity group that collapsed in […]

a woman enjoying a coffee while she reads accounting news with her dog

Monday Morning Accounting News Brief: KPMG Drama; MBA Beats CPA?; ISO: Managers and Senior Managers | 9.26.22

Why is the Ontario Securities Commission examining Canadian audit firm ethics? Spurred by some critical comments, EY UK chair and managing partner Hywel Ball shares his opinion on the EY split: “Audit quality is going to be better.” KPMG and Deloitte alumni are doing some startup automation stuff. KPMG UAE is still working out some […]