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…
In other news:
- How the fleece vest became the unofficial uniform of Silicon Valley investors
- Uber’s Self-Driving Truck Makes Its First Delivery: 50,000 Beers
- Volkswagen’s $14.7 Billion Buyback Deal on Emissions Scandal Approved
- Insider trading cartoons.
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