Accountants run amok

Last night’s NPR Marketplace broadcast had a story about a group of accounting firms that are proposing some changes to corporate accounting. I was intrigued by the idea (after all, these firms should have some great insights into problems with the current system), but I couldn’t believe the train wreck that ensued.
These firms have some really well-intentioned ideas that just don’t seem to hold water. For instance, they want to drive more transparency by sharing more information. Seems like a pretty good idea. They want to share information on employee turnover. Ok, I can see that, I guess.

Then they also want to share information about measures like customer satisfaction. This is where I started scrunching up my eyebrows. After all, customer satisfaction has always been a relative measure, and it’s only as reliable as the means used to measure it. If you’re going to start comparing corporate performance on a measure like this, how in the world do you ensure that you’ve got a consistent and equitable measure of customer satisfaction for all companies?

Finally, the group is lobbying for more frequent reporting. Again, on one level, this makes some sense, but if we step back and look at the dysfunctional relationship between Wall Street and corporate management, financial reporting is right in the middle.

This is a two-edged sword, I admit. You don’t want to let a corporation go off the rails too long before the problem is detected and dealt with. But even with today’s quarterly reporting, there’s a really unhealthy “what have you done for me lately” attitude that pressures management to optimize for short-term results.

I see this as an understandable reaction to some bad apples (Enron, Global Crossing, etc.). This, of course, is the same backlash that fueled SOX legislation. Let’s look at the effect that SOX is having on businesses in the US before we make any more accounting changes. It’s pretty clear that SOX is a major pain for large US corporations, to the extent that Europe views SOX as a competitive advantage for companies headquartered outside the US. At the very least, we’re pouring a lot of money into SOX reporting when we could be more profitably be spending it elsewhere.

Don’t get me wrong. I’m not in favor of crooked managers swindling old ladies out of their retirement money. I’m just not convinced that the answer is to saddle all the honest companies out there with a bunch of onerous accounting requirements.

The text of the marketplace report is available here if you want to read the original. They also have a podcast available.