The Captive FASB? Enron Is Bankrupt, but What about the Financial Accounting Standards Board? (Opinion)
Coughlan, John W., Strategic Finance
The opinions expressed herein are those of the author and not the IMA.
If an artist used the top corner of his canvas for his subject and the rest to explain that the painting was a wheat field, the eye-searing object was the sun, and the dark splotches were blackbirds, that artist undoubtedly would be forced to throw the canvas away because nobody would buy such a painting.
Now consider the "canvas" as today's accounting reports where the complexity of financial reporting has increased by a quantum leap. As a result, the accounting notes reveal more than the actual statements. For several hundred years we had one income statement (the P&L statement), but, now, thanks to the Financial Accounting Standards Board, we have two (Comprehensive Income statement, SFAS No. 130). If you don't find the relevant information in one, you may find it in the other. If it isn't in the other, perhaps it's in the footnotes, and if it isn't in the notes, perhaps it's contrary to GAAP.
At one time the notes were a minor appendage to the statements, but now the statements are a minor appendage to the notes. Wall Street analysts have known for a long time that if you really want to find out what is happening with a company, you have to read the notes very carefully. This state of affairs poses the question: If companies need so much space for the notes, has the time come to discard the statements and find some way to summarize the notes?
In the wake of the Enron-Arthur Andersen debacle and other companies' collapse in the hangover from the stock market boom in the 1990s, it appears to me that something is very wrong with Generally Accepted Accounting Principles. Accountants, business leaders, and regulators need to look very closely at the accounting establishment and how standards are being set, especially scrutinizing the role, operation, and structure of the Financial Accounting Standards Board.
GAAP-COMPLIANT NOTES CONFUSE
In the Enron 10-K for 2000, for example, the notes occupy four times the space of the basic statements. The notes persuade readers that accounting and finance are deep and mysterious subjects best left to the discretion of management and the accountants. According to the "efficient market hypothesis" (EMH), certain information is incorporated or impounded in the price of the stock. Let there be something in a footnote, be it ever so obscure, and, if relevant to company prospects, there are analysts and mutual fund managers somewhere who have noticed it and factored it into their actions. Perhaps most of the information concerning Enron may be found in the notes, but there is so much presented in such mind-numbing detail that it's difficult to get an overall picture.
As a matter of fact, the market didn't know in spring 2001 that Enron was in its death throes. The FASB, thanks to the voluminous and arcane nature of the notes and the complexity of the accounting it prescribes, bears some responsibility for this ignorance.
DID ENRON PAY TAXES?
It isn't only arcane footnotes. Consider income taxes. The unsophisticated might think that whether or not a corporation has tax expense has something to do with whether it sends the IRS money. Thanks to FASB Statement No. 109, "Accounting for Income Taxes' it's difficult to determine whether a company pays taxes. Consider this headline (Washington Post, 2/3/2002, p. A10): "Enron Appears to Have Paid Taxes." Yes, "Appears." The article begins: "One of the big unanswered questions about Enron...is whether it paid...taxes in recent years, when it was reporting growing revenues and profits' How sophisticated must reporting have become when one cannot tell from published statements prepared in accordance with FASB concepts and accompanied by a report from a prestigious CPA firm whether a company paid taxes?
Is it only the market the FASB confuses? In the Enron hearings, company executives told Congress they didn't know, couldn't understand, and relied on the accountants. …