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The Economist coined this cute expression "brittle illusion of accounting exactitude" in an April 2003 article, "True and Fair is not Hard and Fast." The Economist explains clearly that accounting numbers do not represent hard fact because these numbers rely on some estimation process. It illustrates this proposition by examining pro forma accounts (I'm not sure why, since by definition they don't constitute generally accepted accounting principles), off-balance-sheet vehicles, the valuation of stock options, pension funds, revenue recognition and derivatives. Estimates abound in accounting!

(To be more accurate, I don't think it is estimates per se that are the problem. After all, chemists in their laboratories of necessity measure whatever they measure by employing estimates. I think the real concern is that accounting numeration is quite imprecise with its estimations. This, of course, assumes that we know what we are measuring!)

The Economist cites David Tweedie, chair of the International Accounting Standards Board, in support of a current value system instead of the traditional historical cost approach. While there are some good arguments for utilizing current values when measuring assets and liabilities, such as greater relevance, let's get one thing straight. Current values will not eliminate the need for estimates. If the fundamental problem of financial reporting is the brittle illusion of accounting exactitude, employing market values will not help.

Another suggestion is to present line items in financial statements in terms of ranges. I do not have any major problems with this, but I do wonder whether it really solves the problem. After all, where will the top and bottom figures come from when attempting to determine the proper range? You got it, they will be estimated. And unless corporations display the data in terms of very broad ranges, such a tactic might backfire with a proliferation of lawsuits when a range turns out not to include the "true" value. In addition, the use of ranges might lead naïve investors to wonder what managers are hiding and whether some managers would exploit these figures to steal some assets as long as the managers made sure the "true" value stayed within the reported range.

A simpler and better approach would be to educate naïve investors. The Securities and Exchange Commission, in particular, ought to tell these folks to diversify their portfolios, to manage their risk, and to quit trying to beat the market unless they become experts in accounting and finance and truly understand how to discover a mispriced security. On second thought, maybe the SEC should just tell them to quit trying to find mispriced stocks because naïve investors almost always overestimate their investing abilities and their knowledge of accounting.

The report written by the American Assembly extends the notion described by The Economist by shifting the focus from measurement issues in financial reporting to auditing concerns. The discourse asserts that "the most important change must be one of attitude: a recognition that audits are not and cannot be as precise as investors have believed and would like them to be." Undoubtedly, part of the imprecision in auditing is a function of the imprecision in the accounts; however, the author is remiss when he gives the impression that this factor is the main or perhaps the only cause of auditing woes. It isn't.

The tract itself acknowledges that auditors have yielded to management pressure to present bogus numbers. This fact has nothing to do with the inherent imprecision of financial accounting numbers; instead, it reflects and reveals serious defects in our economic institutions and cultures. Let's not rewrite history and blame the audit failures on something else.

Instead of searching for alternative explanations, let's face the facts and think about how we can improve the profession. What can we do to strengthen the American Institute of CPAs and state ethics boards? How can the culture be enriched at accounting firms, especially with respect to professional and ethical behaviors? How might we amend the current institutions of accounting to increase the power of external auditors?

We shall never rid accounting of estimates, so let's quit trying. Other than educating investors, not much else can be done. On the other hand, we can improve the psychological and social and economic forces at play in the world of financial reporting and independent auditing. Let's focus on what we can improve -- and improve them.

To obtain a copy of "The Future of the Accounting Profession," go to http://www.americanassembly.org

J. EDWARD KETZ is accounting professor at The Pennsylvania State University. Dr. Ketz's teaching and research interests focus on financial accounting, accounting information systems, and accounting ethics. He is the author of Hidden Financial Risk, which explores the causes of recent accounting scandals, and columnist of The Accounting Cycle for SmartPros.com.