While Mr. Wriston made valuable comments about the ridiculous complexity of accounting standards and about the rush by Congress to pass any bill, regardless of merits, to prove that members are solving the problem of accounting abuses, he goes too far in trying to find a causal link between simplicity and ethics.

 

Walter, let me tell you bluntly -- there ain't no such relation. I don’t care how simple rule makers write the accounting regulations, there will not be an automatic compliance with them. Similarly, I don't care how complex the rules become, principled individuals will still fulfill their duties. Surely, every parent has experienced the intentional disobedience of a child who clearly understands the rules, but chooses to do things his or her own way. Likewise, individuals who understand accounting rules completely might still have incentives to go their own way.

 

We should admit that Gordon Geckos who believe that greed is good do exist in the real world, and rules will not circumscribe their actions, whether simple or complex. The central problem rests with the human heart. The avarice of some people has no bounds, and this quandary is independent of the structure of accounting rules.

 

Unfortunately, the theme of his commentary distracts the reader from one of its stronger points. Accounting rules are far too complex. As Wriston points out, managers and auditors have both pushed for more refinement in the rules to gain greater clarity about what they can and cannot do. (I shall add lawyers to this list, though their rationale seems to lie with producing more lawsuits and thus generate more billable hours.) They apparently don't realize that this process never ends, for more detailed rules always lead to further questions that require greater illumination.

 

Wriston then points out that the International Accounting Standards Board follows an approach that attempts to lay out principles rather than detailed rules. I agree with Mr. Wriston that this method would be better, but not necessarily to make accounting more ethical. The advantage of having principles instead of detailed rules is that it helps one to maintain focus, to remain clear about the purpose of the activity. For example, I would much rather state as a principle that firms must report all commitments on the balance sheet. Then when I run into an SPE, there is no doubt that the firm’s commitment should appear in the financial statements. This approach could avoid the hair splitting, legalistic style we see corporations and auditors employing.

 

The question is whether such a principle would lead managers to report SPE commitments the way they ought to be and whether auditors have enough chutzpah not to sign off on the audit report until the firm recognizes the liability. This leads us back full circle. Simplicity in rules might help accounting to make more sense, it could help practitioners to keep the rationale in mind, and it could assist decision makers in what to consider when thinking about what is right. Simplicity in rules, however, does not change the character of the participants, nor does it strengthen one’s backbone.

Write to the author with your thoughts at k55@psu.edu or to SmartPros Letters to the Editor at editor@smartpros.com. To rate this article, scroll to the bottom of this page.

J. EDWARD KETZ is associate professor of accounting in Penn State's Smeal College of Business Administration. Check out his column, where you'll find more articles on controversial, cutting-edge topics.