reside in the public sector. We will be faced with numerous problems as we
sector, principle-based or rule-based standards, and convergence or non-
Much of the history can be viewed as a succession of actions and reactions.Accordingly, to comprehend the forces at play as we entered the twenty-rst
Research in Accounting Regulation, Volume 18, 295302Copyright r 2005 by Elsevier Ltd.
All rights of reproduction in any form reservedI graduated from college in the spring of 1980, took the CPA exam, andbegan my professional career with the rm of Deloitte, Haskins & Sells incentury, it is useful to understand the decades of the 1980s and 1990s that inmany ways spawned the corporate scandals and the dysfunctional account-ing model that greeted us as we began a new century.convergence with international standards setters?
2. PERSPECTIVE: THE DECADES TOTHE 1980S AND 1990Sattempt to converge U.S. standards with international accounting standards.
1. THE CROSSROADS
Which road to take: fair value or historical cost, private sector or publicSTANDING AT THE CROSSROADS
Peter R. Bible
Today the accounting profession is standing at the crossroads. The corpo-rate world recently closed two decades of unprecedented greed and corrup-tion. As accountants, we presently nd ourselves with an overly complexrules-based, mixed-attribute accounting model, the future of which couldISSN: 1052-0457/doi:10.1016/S1052-0457(05)18017-5
Columbus, Ohio. At that time, the U.S. economy had weathered a sustainedperiod of ination; the Financial Accounting Standards Board (FASB) hadissued 38 statements and four concept statements; the Emerging Issues TaskForce (EITF) did not exist; the Dow was at 600; the yellow pages forattorneys were actually yellow and required only three pages; the prime ratewas at 21 percent; and the United States and Russia had accumulatedenough nuclear power to destroy each other several times over. I neverthought then that I would view these as the good old days.During the course of the 1980s, the economy recovered, the Cold War
came to an end, the securities markets ourished, and the FASB includingthe EITF set sail on an overload of rules-based fair-value standards.Something much more fundamentally wrong was emerging, however. In
1986, I went to Deloittes National ofce to work in accounting research fortwo years. During that time, I helped develop EITF 86-16 and 88-16 onaccounting for leveraged buyouts. After this two-year assignment, I relocatedto the New York practice ofce to continue working on mergers and acqui-sitions activity until that market collapsed in 1991 with the RJR Nabisco deal.From 1991 to 1994, I continued to work with Wall Street investment
bankers on the development, pricing, and issuance of collateralized mort-gage obligations. The transactions I worked on during this eight-year periodbecame the subject of three movies and/or books: Wall Street, Barbarians atthe Gate, and Liars Poker.If any of you have read these books or seen the movies, I can assure you
that the excesses displayed were not exaggerated and, in fact, most werepresented in the most favorable light possible.In 1988, Michael Douglas in his famous greed is good speech in Wall
Street laid out for us to ponder the fact that during the 1980s somethingfundamentally wrong was emerging. We will have to leave the root causes ofthis newly found obsession with wealth and power to the sociologists andhistorians. One thing had become unfortunately clear: JFKs rising tide wasnding only certain yachts.Very few of the transactions that I worked on were done to benet Main
Street; to the contrary, they were done to enrich a select few, many timesexcessively.So the roaring 1980s came to a screeching halt. Ivan Boesky and Michael
Milken were sent to jail by a young U.S. attorney for the Southern Districtof New York named Rudy Giuliani. Many of the corporate raiders andinvestment bankers sailed into the sunset. Unfortunately, their legacy of
PETER R. BIBLE296rampant misuse of insider information, obsession with wealth and power,and complete disregard for the U.S. securities laws would carry on. The
FASBs and the EITFs onslaught of rules-based fair-value pronouncementswould also, unfortunately, carry on.
2.1. Sustained Economic Expansion, Unprecedented Market Performance:
Greed, Rationalization, and Entitlement
The 1990s started as a period of reection and reform, but would end inmuch the same manner as had the 1980s.In 1994, I was assigned to a special unit in the rm tasked with defend-
ing partners and clients who had strayed over the line in the 1980s. In thisrole, I also conducted independent investigations for audit committees ofalleged accounting irregularities. I believe this work is now called forensicaccounting.The two most memorable of these investigations involved publicly traded
companies, which, at the time, were darlings of Wall Street. Both had grownexponentially through acquisitions accounted for by the purchase method.Both companies used purchase accounting to record what are now referredto as cookie-jar reserves that were subsequently released into income tocreate the illusion of protability. One of these two companies liquidated inbankruptcy and the other survived and is now a household name.What struck me at the time is that while the FASB and the EITF were
preceding down the path that fair-value accounting was the answer to cor-porate corruption, here were two companies that used the oldest of the fair-value models to manipulate earnings.In 1995, after four years as a partner, I left the rm and joined corporate
America, rst at GTE and now at General Motors. Little did I realize thatthe real fun was just about to begin.Among other things, the decade of the 1990s was dened in large part by
sustained economic expansion and unprecedented stock market perform-ance. But the 1990s also sowed the seeds of the scandals that would follow,causing some to describe the decade, in hindsight, as a decade of greed,rationalization, and entitlement.What happened? On the base of a long-standing bull market, the Dow
started to grow as if it were on steroids. Reaching 2,000 for the rst time inthe late 1980s, the Dow peaked at 11,700 in January 2000. By the late 1990s,investor participation in the capital markets had broadly expanded withalmost half of the households in the United States owning stocks.The allure of the unlimited potential of technology and, more specically,
Standing at the Crossroads 297the Internet caused many of us to suspend judgment and common sense.Several of us threw money and careers at anything with dot.com at the end of
its name. Fortunes were being made overnight by young kids emerging fromgarages and by nancial brokers playing fast and loose with the market.The marketplace is a stern taskmaster, however, and the rules of the mar-
ketplace will always prevail. Sooner or later, dreams collide with harsh re-ality. Eventually, only real value that results in cash ow is rewarded. Thosewho took shortcuts were discovered, and they reaped what they had sowed.The dot.com bubble burst, the economy slowed, and the scandals
emerged. The Dow lost 35 percent by July 2002. Depending on the asset mix,many investors lost one-third to two-thirds of their retirement accounts.
2.2. Reasons for the Dysfunctional Behavior
Why did this happen? There have been numerous explanations and will bemany more to answer this question. Ultimately, no matter what the sur-rounding climate, dysfunctional behavior during the 1990s and the scandalsthat followed can be traced to failures of the human condition more thannancial manipulation or wizardry with numbers.In the 1990s, there existed in many people a sense of entitlement to wealth
that seemed to be there for the taking, even it if meant bending the rules abit. The supposedly smart but misguided move was to be aggressive andtake risks on a future that would certainly bail out or cover up todaysmanipulation. This was a time ripe for abuse.As stocks declined and the market correction continued, losses mounted, and
improper practices within the capital markets were discovered. Horrendousstories emerging from Global Crossing, Enron, WorldCom, Health South,Tyco, Adelphia, Xerox, Rite-Aid, and many more rocked the marketplace.
2.3. Results of the Climate in the 1990s
What did we get? Congress stepped in with the SarbanesOxley Act of 2002,and the Public Company Accounting Oversight Board was born. TheFASB, under harsh criticism, issued FIN 45, FIN 46, and EITF 01-08, threeof the worst accounting standards ever issued.The New York Stock Exchange weighed in with its own set of corporate
governance standards, and the SEC issued a slew of new rules. We lost botha major accounting rm and the AICPAs ability to set auditing standards.Ultimately, the legacy of the 1990s was a period of euphoric economic
optimism combined with a crisis in the human condition resulting in
PETER R. BIBLE298corporate scandals that rocked the marketplace and changed how we dobusiness forever.
been issued earlier, the collapse of Enron could have been avoided. On
another occasion, a different board member told me that we should not beallowed to apply Statement 106 to the Medicare reform passed in late 2003because it will serve only to increase our year-end bonuses.One does not need to look much past the accounting for negative good-
will in Statement 141 or the accounting for exit activities in Statement 146 torealize that much of the modern hierarchy is based on the perceived need to3. AGAIN AT THE CROSSROADS
So now we are back at the crossroads. Which road do we take? Without thebenet of time travel, we have only history to guide us down the appropriatepath.
3.1. Standards Setting: Private or Public Sector?
Let us start with the easy issue: private versus public sector standardssetting. Unlike others in the preparer community, I do not believe thatthe FASB has been a failure. I believe that the FASB has advanced theaccounting model to the benet of the markets and the economy.The FASB allowed itself to be unduly inuenced, however, by those who
believe that fair value is the answer to all ills including those of the humancondition. Proponents of fair value claim that it is a more relevant conceptthan others, but have yet to articulate why this is so.As a result, todays preparers of nancial statements must contend with a
set of rules that preclude a thorough knowledge, are not easily translated forthose responsible for operating the business, and produce nancial state-ments that even the most sophisticated users cannot readily understand. Inshort, what we are left with is a model that I fear has lost its relevance.Standards setting, however, should be allowed to remain in the private
sector. Some believe that this battle has already been lost and that theFinancial Accounting Foundation will eventually be folded under the Se-curities and Exchange Commission. For this reason, I believe that it isimportant for the FAF to act quickly to revamp the way accounting stand-ards are developed. For example, I nd it interesting that the preparercommunitys participation on the EITF has been limited so that it cannotblock a consensus.On one occasion a member of the FASB told me that if Statement 133 had
Standing at the Crossroads 299counter abuses. This is not the framework on which an advanced societyshould be setting accounting standards.
3.2. International Standards: Convergence or Nonconvergence?
Let us look at the other easy issue: Convergence or nonconvergence withinternational standards setters.I have been very impressed by the members of the International Ac-
counting Standards Board whom I have dealt with, and I believe that ul-timately convergence is in the best interest of efcient global capital markets but what is the hurry? After all, we are principally dealing with a continentwhose individual members have been at war with each other for most ofrecorded history. Even Sir Davids home country has yet to join the Eu-ropean Union. I believe that the rush to converge was brought about un-fortunately by the EUs reaction to SarbanesOxley.In the information systems world there is a movement toward what is
called global common systems. Those of us who have pursued this strategyhave found it to be a fools errand because customs, regulations, and gov-ernments are still very much based on the geographic rather than the mar-ketplace paradigm. I think we are years away from local governmentsembracing world markets.Perhaps the lower cost labor pools in Eastern Europe, India, Korea, and
China will help advance this paradigm shift. For now, however, short-termconvergence, like global common systems, looks to be a fools errand. Onedoes not need to look further than the attempt to converge on APB 23 torealize that we are moving too fast.
3.3. Basis of Standards?
Now for the two more difcult issues: Should the profession be governed byrules-based or principle-based standards and historical cost versus fair-valuebased standards? These two issues are perhaps the most affected by thelegacy of the 1980s and 1990s. A cold reality today is that those of us leftstanding have to reap what others have sowed.The Federal Bureau of Investigation, along with the SEC Enforcement
Division and the Internal Revenue Service, are presently investigating 158large-scale corporate fraud cases, 16 of which have losses in excess of $1billion each. These agencies are opening two to six new corporate fraudcases a month and are presently handling more than 2,500 cases involvingsecurities fraud. In 1998, 5 percent of nancial fraud actions involved For-tune 500 companies; in 2003, 17 percent involved Fortune 500 companies.
PETER R. BIBLE300The downfall of both principle-based and fair-value based standards is thatboth required the use of judgments. Judgments in todays world come with
we live make principle-based standards, like the APB itself, a fond distant
memory. Perhaps some day, with tort reform and a shift in the present humancondition, we can return to the good old days and principle-based standards.Most fair-value accounting measurements are mathematical or market
based and are only as relevant as the prevailing conditions at the time.Valuation experts and actuaries alike will tell you that their work is as muchabout the brush as it is about the pen. I want to contrast that statement withthe illustration of a check written for $1,000, cashed for $1,000, and re-corded as $1,000. Throughout all of humankind, this transaction will remaina $1,000 transaction. Historical cost is the most relevant measure, and it canbe audited leaving nothing to doubt or to chance. Fair value does have itsplace and to think that Statement 33 had it right! in a footnote.My proposal for fair-value nancial statements is to rst take the current
accounting literature and throw out Concept Statement 7 and all standardson which it was based. Next throw out Statement 133 and any other stand-ard that requires market-based ac...