On August 2, 2002, the SEC sent a memo to the American Institute of CPAs SEC Regulations Committee, notifying members about the SEC position on "IRU capacity swaps." The SEC stated the obvious when it pointed out that APB Opinion 29 is the applicable guiding literature.
 
As a reminder, APB Opinion 29 involves the accounting for barter transactions, which the APB referred to as nonmonetary transactions. The APB divided these transactions into two types, those comprising similar assets and those embracing dissimilar assets. We can illustrate the first category with the trade of one automobile for another. An example of the second group is the trade of a car for a stereo system. The APB concluded that the trading of similar assets should not entail the recognition of any profit or loss because the earnings process is not complete. On the other hand, the board stated the trading of dissimilar assets does require the recognition of a gain or loss on the exchange. (Giving or receiving cash complexifies the situation, for the APB says we need to treat the transaction as part monetary and part nonmonetary. This treatment, however, does not change the basic theme of what’s going on.)
 
Now in August of this year the SEC informs us that the telecoms should not be recognizing profit on these swaps of bandwidth (excepting in cases where cash is transferred). Why? Because these transactions involve similar assets! Like, duh! Any non-Arthur Andersen accountant knows that!
 
Besides the lack of alacrity, the real criticism concerns the question of why the SEC felt it needed to send out this memo. Did it think there was any doubt about the nature of these exchanges? Did it think it had to train or educate accountants how to apply professional judgment? Did it think it had to find political cover for not taking an aggressive enforcement stance until after the damage was done?
 
I suggest the Office of Chief Accountant makes two changes. First, assume that you are dealing with professionals who know what they are doing. After all, the AICPA code of conduct requires CPAs to accept only those engagements in which they have relevant competence. Further, I would assume that these people know how to read and they can find the relevant literature on their computers. I would also assume that these people understand their professional obligations.

 

After making these assumptions, the second thing the Office of Chief Accountant should do is to enforce the rules. Ferret out the unprofessional activities and send the information to the Division of Enforcement and to the Division of Corporate Finance. By helping them do their job, the Office of Chief Accountant will get across the idea that -- gee willikers! -- CPAs should actually follow GAAP instead of twisting it like a pretzel.
 
Accounting for telecom swaps was and remains very easy. The profession needs to quit playing games and quit aiding and abetting top managers in their corruption of accounting. If we do our jobs, then we won't have quite so many Global Crossings and Qwests who make a mockery of our accounting and our auditing.

 

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.