WSJ: As Lawyers Invade Accounting, Clarity Flees (?????)

[papau]

As Lawyers Invade Accounting, Clarity Flees

The Wall Street Journal, August 9, 2005


While reading the "white paper" prepared by lawyers for former AIG CEO Hank Greenberg, a thought struck me: This is all about accounting, not law!


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But most people don't know how flexible corporate accounting can be, particularly in an insurance company. At AIG, the auditors and some of the executives who furnished the restatement had produced the very reports they were revising. AIG operates in 130 countries and conducts "tens of millions" of transactions every year. Restatements in such a complex world aren't extraordinary, for reasons, like honest mistakes, that are not criminal in nature. Merely adjusting the amount of earnings set aside for loss reserves -- a judgment call based on guesses about what damage the future holds -- can make a world of difference. The AIG reviewers also decided to charge the company for deferred executive compensation provided by an outside entity Mr. Greenberg had founded, Starr International. That substantially reduced reported earnings.

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That industry has been laboring for decades, through the Financial Accounting Standards Board (FASB), to try to get its GAAPs right. That didn't save the huge Arthur Andersen from being destroyed by the Enron scandal because it didn't figure out that Enron was using shell companies to hide losses. So just to make things a bit more complicated, Sarbanes-Oxley set up the Public Company Accounting Oversight Board. Now industry has to comply with FASB, the SEC, the new PCAOB, state-level regulatory boards, and industry-specific regulators, not to mention free-floating agencies such as the federal and state environmental protection agencies.

An American Enterprise Institute paper by Alex J. Pollock last month argued that this is converting accounting from a profession where professional judgment comes into play into a rules-based field employing mostly technocrats. He does not see this as an improved way of conveying to investors what is actually going on with a company, given the endless number of contingencies that rules can't cover.

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What this suggests is that the American legal system is itself breaking down under the burden of too much rule making and litigation aimed at raiding the deep pockets of business corporations. By invading corporate accounting the legal eagles also are interfering with corporate decision making. It would be nice to think that this will bring better decisions and greater transparency of benefit to investors. But what it looks like now is just a lot more money -- a lot more -- for lawyers and accountants.