| Accountability
and Valuation
An Old Challenge in the Future of Accountancy
By
Robert H. Colson
OCTOBER 2005 - In
1994, after almost a 15-year hiatus, I again began preparing
students for the CPA exam. On the theory portion of the
exam, I persistently got the question about the purpose
of financial accounting wrong until I read the review book’s
explanation. Whereas the financial accounting texts I used,
my education, and my experience had left a pretty
definite impression that financial accounting was concerned
as much with management performance as with entity performance,
by 1994 the only correct answer was entity performance.
This
incident came to mind recently because of the intense interest
in the current FASB and IASB conceptual framework projects.
There is a flurry of activity and discussion right now from
many quarters about accounting fundamentals, and in past
editorials I have reflected on the concerns that have come
across my desk, into my e-mail inbox, and through conversations
with a wide range of individuals.
Some
of these communications are very curious. “Fair value”
accounting was a muddle to one caller, while “accountability”
had no meaning to another caller just a few minutes later.
Just as curious, those who do not understand “accountability”
have no problem understanding the concept of “fair
value,” and those who do not understand “fair
value” have no problem understanding “accountability.”
With
regard to the long-term core issue about the purpose of
accounting, accountants have been divided about equally
over accountability and valuation. At any specific time,
however, one view is usually in ascendance, tacitly supported
by a silent majority while a vocal minority protests the
status quo. At times, a few have tried to seriously consider
both.
Differences
in Orientation
Accountability
systems are focused on management performance in the recent
past. They are similar to what each of us does at the end
of the day when we try to explain how we started with $100
and ended up with $5. What did I spend that money on?
Valuation
systems, on the other hand, focus on the entity and its
future. They are similar to what I might do at the end of
the day when I have only $5 left in my wallet and I begin
wondering whether this particular $5 bill might happen to
have a president’s autograph on it and therefore be
worth a lot more. Accountability and valuation systems articulate
in situations where the day’s activities were purposely
oriented toward acquiring the autographed $5 bill.
It
might be easy to analyze and assert how I spent money and
somewhat more difficult for someone else to verify my statements,
but if I knew that I would be held accountable, I would
be careful to spend wisely and document appropriately—or
to lie convincingly. On the other hand, if there is an active
market in such autographed bills, it would be relatively
easy for everyone to agree on its value. In the absence
of such a market, or for a variety of other reasons associated
with future events, on the other hand, it could be quite
difficult to establish a mutually agreeable valuation for
the bill until it is sold.
Perhaps
because American culture values individualism more than
many other countries’ cultures do, we tend to internalize
accountability rather than making it public. How many of
us actually relish accounting to others: punching the time
clock, filling out the time card, or completing and justifying
the expense report? On the other hand, almost every American
is ready and happy to broadcast how much an asset (often
carefully selected) has appreciated in value. Psychologically,
it could well be that there is more comfort among more people
with valuation than with accountability, especially our
own.
The
Accountability Age
While
during the 1970s there were many reasons (many still valid)
why accounting was not adequately oriented to asset and
liability valuation changes, today there are growing indications
that Americans are becoming more interested in accountability
issues, especially as they relate to the managements of
powerful social institutions, whether in the government,
business, or nonprofit sector. Comptroller General of the
United States David Walker recognized this trend when he
initiated the renaming of the General Accounting Office
to the Government Accountability Office. Sarbanes-Oxley
Act section 404 is another indication of this interest,
as are various efforts by individual states to achieve more
accountability through new regulation or legislation.
How
can accounting professionals contribute to this renewed
interest in accountability, however, when the principles
under which they account remain focused on entity valuation?
Even the application of financial reporting qualitative
characteristics (e.g., decision usefulness) precludes serious
consideration of past performance. The responsibilities
for the standards setters are clear as long as accountability’s
place in the conceptual framework is limited to a one-sentence
allusion to “stewardship,” while the rest of
the framework, along with the authoritative statements and
interpretations that flow from it, focuses on entity valuation.
Time
will tell whether accountancy will rise to the challenge
of dealing constructively with both management accountability
and entity valuation.
Robert
H. Colson, PhD, CPA, is a partner of Grant Thornton
LLP. From June 2000 to August 2005 he was Editor-in-Chief
of The CPA Journal. This essay completes a series of related
columns he began earlier this year; it was replaced in the
September issue by his farewell column. The editors welcome
other editorials and commentaries, which can be submitted
to
cpaj-editors@nysscpa.org.
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