Acc9110HFall2010

Although Accrual Based Accounting methods bring with them great benefits like allowing the management to exercise better management of assets, gives a fair description of the financial position of a company at any given point of time and more importantly in today’s times of complex business transactions allows them to be recognized fairly. It had allowed managers the ability to present to shareholders a much better picture of how the company is doing over a long period of time.

The author touches upon how the introduction of “estimates” complicated and increased the problems the industry already faced. Since Lanxin and Anelisa have already touched upon the points pertaining to how estimation can be sometimes misused by corporations to manipulate and misreport earnings and how its is necessary for the investors to be careful and conduct their own research before making any investing decisions.

I would like to elaborate and talk about a topic that the author briefly mentions about “Fair Value Accounting.” I would like to elaborate about this form of accounting and how it has over the last few years been come to blame for one of the biggest economic crises we have seen in our lifetimes.There are proponents who blame fair value accounting for our current economic crisis since it valued a lot of the assets that financial institutions held to pittances. Detractors of this form of accounting suggested that it led to many banking institutions failing and which further led to fall in the value of assets.

However not marking to market would also mean that institutions and corporations were in essence trying to shy away from the problem at hand until it got manageable/ or probably worse and is not often the best approach. The solution to this issue could be a middle way out and an accounting practice that would segregate how assets are valued and carried on books based on their purpose.They could also be categorized based on the possibly predetermined length of investment and purpose of investment. But panning either method of accounting is not a solution to the problem on our hands and the FASB in collaboration with governments and corporations should work towards coming up with the most effective and transparent accounting practices.

I believe Accrual Based Accounting is an inevitable accounting practice in today’s times of complex business arrangements. But addition of Footnotes and specific directions on Assumptions made by management of corporations and increased investor awareness will make the reporting system foolproof and the markets more efficient.

The author of the article speaks about the beginning of a long process of congressional meeting into the Enron case, the largest corporate bankruptcy in the history of the United States. The limited success that F.A.S.B. achieved due to the constant meddling of Congressional members was one of the biggest contributing factors to the bankruptcy case. Had the F.A.S.B. actually got serious about making reforms of the current accounting model, like adjusting reported earnings for changes in current prices of assets, recognizing and amortizing many intangible assets that were not even seen on the balance sheet; the Enron debacle would have been easily avoided. A lot of investors along with likes of Warren Buffett and the S.E.C. also supported most of F.A.S.B.’s initiative but were given a blind eye by the Congress.

F.A.S.B should have taken a stronger stance in passing laws since Congress will at times make biased decisions since it’s clear that the law makers always serve corporate interests and not those of investors because that’s where the biggest chunk of the campaign funds lies. Enron was a crisis that could have been avoided had the Congress not intervened in accounting policies that they have little knowledge about. It’s another blatant example of the misuse of bureaucratic power proving the arrogance of a group of individuals, blinded with power, greed and money; that for a couple of dollars would sell their souls to the devil. The underlying truth which is never sensationalized or what does not come to light is the lives of the millions of small investors that get affected when these companies go bust. Who is accountable for this blatant disregard for the retailer’s wealth? Where do we draw the line?

Each member of your group is responsible for posting a comment on the article assigned for the blog no later than the end of the week (Friday) when you present.  The articles are available on Blackboard in the Readings folder.  The presentation groups are responsible for the following articles:

Presentation 1: Unaccountable in Washington

Presentation 2: The Ones That Got Away

Presentation 3: Confuse About Earnings?

Presentation 4: Investors, It Pays to Mind the GAAP

Presentation 5: Pro Forma Earnings

Presentation 6: Yahoo and Google Revenue Recognition

Presentation 7: Attack Costs Aren’t Extraordinary

Presentation 8: The Gift Card Comes Wrapped in Growing Risk

Presentation 9: The Credit Crisis

Presentation 10: Called to Account

Presentation 11: Qualified Audit Opinion

Presentation 12: Going Concern Opinions

Presentation 13: A Price Worth Paying

Presentation 14: Are Foreign Issuers Shunning the US?

Presentation 15: IFRS Op Ed

Perhaps the FASB should consider revising the definition of “Extraordinary” to include degrees of damage. For example, with respect to the 9/11 terrorist attack, the FASB cites, among other things, the potential for future attacks as the rationale for considering all events involving terrorism as ordinary. But the truth is, since 9/11, we’ve put in place new security measures designed to thwart future terrorist attacks. And since 9/11, we’ve also successfully stopped at least a couple attempts. In addition, the public has become very sensitive to the potential danger that terrorists pose. As a matter of fact, the Christmas day bomber was stopped by average Americans who took action when it became clear they were in danger. These efforts contribute to the low frequency of terrorist attempts we see here in the United States. They also reduce the potential for terrorists to do spectacular damage to us. My point is that we live in a new world. It is time therefore to amend the rules to reflect that fact. And one way to do that is to start recognizing degrees of damage.