View From a Height

Accounting Conservatism

In Financial Accounting and Reporting last night (also known as Fraud 101), we started in on Enron. With masks and gloves and scale at the ready, we pulled back the covers and began our own autopsy. Amid the talk of stock watering and push-me-pull-me companies, came the discussion of red flags, especially compared to other industry companies.

"But," the professor asked, "what is Enron's industry? They're trying to create a new industry all by themselves." It certainly does make it hard to find a standard for comparison. Enron's business, fraud aside, was to try to be the bookmaker for the world, to become a marketplace for just about any saleable commodity. "They even were talking about setting up a market in pollution tax credits!"

Wait a second.

Just as some cops come to believe that inside every citizen is a thug, do some accountants come to believe that inside every legitimate market is a fraud? What Enron did with its own stock was repulsive. But Global Crossing was just as crooked, and nobody would claim that long-distance or fiber optic capacity weren't legitimate assets. Pollution tax credit markets are a fine way to help reduce pollution, although they offend the regultory impulses of environmentalists. As long as the asset is real, there's no reason it can't serve as the basis for derivatives.

This professor's reaction helps confirm some of my worries about Sarbanes-Oxley. Accountants may well go from asking how we value an asset to assuming that we can't. Along the way, a large number of good ideas may get thrown out with the few truly fraud-inducing ones.

Business is too important to put in the hands of accountants.