Essay by devilidevil September 2004

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The Great Accounting Scam

The US government is attacking capitalism under the guise of cracking down on "corporate criminals." Corporate CEOs are being demonized and blamed for the collapsing stock market Bubble. Exploiting the Enron and WorldCom bankruptcies, Washington DC has imposed the most sweeping accounting and securities laws since the 1930s.

Unfortunately, the political class that granted itself sweeping new power over corporations lacks even a basic understanding of financial reporting, investing, or the stock market. New "corporate responsibility" laws will make financial reports less informative to the average individual investor.

The myth driving federal legislation in 2002 is that accounting is largely unregulated. In reality, there have been too many accounting regulations spawned by a dysfunctional regulatory and legal climate. The federal government has mandated a national set of accounting standards, set by the Financial Accounting Standards Board (FASB), there is no competition in this role. One set of rules often gets imposed, to the exclusion of other.

FASB is a so-called Self Regulatory Organization, but in practice it is supervised, influenced, and heavily politicized by regulators at the Securities and Exchange Commission.

In the past, financial reporting was based on broad principles that were relatively easy to apply. International and British accounting standards are still based on broad principles that govern basic situations. They do so on the theory that detailed rules are too easy to evade and give a false sense of certainty regarding the accuracy of a financial statement at a given point in time.

In the US, the SEC's regulatory zeal has pushed accounting rules in the direction of excruciating detail. The SEC now attempts to prescribe increasingly specific accounting rules for every ambiguous situation, in order to prevent every conceivable fraud or misleading representation. The auditors welcomed these detailed rules, in order...