Not picking on me at all - instead I feel informed. And I'm abandoning my plan to get my CPA.

Follow up questions: "Why, then, are the CPAs so handsomely paid by the corporations that hire them?" "Is it that the corporations are paying for the results that they desire?" "If the CPAs' services result from regulatory requirements, to what extent should the investing public be entitled to rely upon their reports?" "Do CPAs have olfactory problems?" Keep in mind that attorneys are advocates for their clients for the most part and that is what outsiders expect of them. Perhaps CPAs are disguised (undisguised?) advocates for the clients who pay them. My long ago favorite bartender (the late Bill Stone) held very little regard for a CPA which meant to him "Cleaning, Pressing and Alterations". Come to think of it, this is confirmed by Geoffrey's post, isn't it?

I think its an overstatement that "folks who fail to dot their i's and cross their t's" are going to jail. Failure to pay attention to details may put directors and officers on the hook civily if it results in a material misstatement or omission but criminally only if done willfully or the like.

Not quite sure where your antipathy to accounting comes from, but, as I’ve said elsewhere on this blog, there is incontrovertible evidence that financial accounting reports do provide quite a bit of information that is relevant in determining the value of the firm. I also think both your comment and article unfairly conflate management accounting, the use of financial information to manage the firm, and financial accounting, the use of financial information to conservatively reflect the value of the firm.

Bill: I agree -- that was inartfully worded. I didn't mean to imply that insufficiently detailed reporting would lead to jail time. I really meant that, in our regulatory regime, fraud is a function of compliance (or noncompliance) with the SEC's prescribed rules rather than the actual content of the information disclosed. In other words, regardless of whether the required disclosures are or are not actually useful to investors, liability may result from errors of timing and the like. I think my point is actually of a piece with this comment and this comment of yours on an earlier post on this blog.

Michael: I guess you're referring to this comment re the incontrovertible evidence of the value of accounting in determining the value of the firm (finding which, by the way, pointed me to Bill's comments linked above). The question is not whether financial reporting is always and everywhere useless, it's whether the additional information adduced in accordance with the SEC's requirements provides marginal net benefit. It does seem likely that some market participants can derive relevant information from financial reporting and, thus, that some reporting is useful to the market -- so I'm sure your "literally hundreds" of studies are correct. But that, in and of itself, does not support our regulatory regime unless your studies also demonstrate that the valuable information wouldn't have been disclosed anyway and, even then, that the costs of forcing disclosure are less than the benefit. I htink George Benston's studies (and others) say these hurdles aren't likely met.

My point was simply that financial accounting (and I take your point about the distinction between managerial and finacnial accounting, but the essential point still holds) is inherently unreliable and probably superfluous in our well-functioning markets, so why exactly are we focusing our (expensive) regulatory efforts on its disclosure?

By the way -- not that this would be your answer, I'm guessing, but I would accept in response to that question, "because the forces pushing for regulation will not be defeated and the alternatives would be even worse."

Geoff,

It is quite easy to condemn the accountants and blame them for the markets problems; it is quite another thing to suggest a workable solution. If accounting data and reports are so “questionable” what do you propose that is better? Should we allow companies to report what they want? Or we could require companies to give open access of their books to everyone. Both of these are fraught with problems that I would argue are far worse then problems “caused” by accountants.

Also, I’m not sure what you mean by financial accounting being “inherently unreliable and probably superfluous in our well-functioning markets.” I agree, that accounting is not an exact science (similar to law in that nature), but there are upper and lower limits on what are acceptable. Since these are fully disclosed, the user can make reasonable intrepretations of the data for themselves. How would the markets function without the information from accounting—sales, expenses, return on investment, etc.? What basis do you propose to use to value a company?

Unless you have a better solution to the current system (I do admit there are problems), why “throw the baby out with the bath water” in a catch-all condemnation of accounting?

You appear to conflate two issues: (1) whether more regulation (e.g., SEC or PCAOB oversight or rules) will improve matters versus (2) whether improved financial literacy [of audit committee members] will improve matters.

In a recent [May 2004] Harvard Business Review article, Professor Roman Weil of the University of Chicago Graduate School of Business argues against the first approach, consistent with Professor Benston, but is appalled at the financial illiteracy on boards. Weil is on a mission to expose financial illiteracy on corporate boards and to fix it. He has little patience for those who don’t get how serious and widespread the problem is. Read the article—it explains succinctly what financial illiteracy is and the accompanying financial accounting quiz is a real eye opener.

This brings me to my second point. I would assert that the financial illiteracy of business lawyers is equally appalling. A recent survey found that 80% of Forbes 1,000 executives believe that their attorneys lack an understanding of accounting and finance! The language of business is accounting, and its underlying theory is that of financial valuation. Yet few lawyers have been trained in either accounting or finance, and the training that does occur tends to be either too pedestrian or too esoteric to be useful in practice. While business lawyers do not need to be financial economists or accountants, they do need a thorough knowledge and mastery of the concepts.

I came to this realization late in life, and went back to business school to address this deficiency. Subsequently, I returned to my law school, the University of Texas at Austin, to teach financial accounting to bright and earnest second and third year law students. It was one of the most fulfilling experiences of my career.

I hope to address this second topic—the deficiencies in teaching financial accounting and finance in the typical law school curriculum-- more thoroughly in a future posting. Professor Roberta Romano of Yale Law School has some interesting recent thoughts on this topic in After the Revolution in Corporate Law, available on SSRN.

in 2000 my old accountant made a mistake. i got it amended and got a new CPA in 2002, he has been working on 2001,2002, 2003, 2004 for over 3 years to the tune of $30,000 per year billing and i still dont have any taxes finished to file. it is now Dec 2 2005 and i have an in house accountant who can help him. he doesnt even come one time a month. do i have any recourse? this is not right and i will have so many penalties. what can i do?