(Via TaxProf Blog)A tax song: Taxes Are Best When You Pay Nothing At All

Today's WSJ had a great opinion piece: "As Lawyers Invade Accounting, Clarity Flees".

The gist:

No one can say [New York Attorney General Eliot Spitzer] isn't smart. Corporate accounting, contrary to popular belief, is chock-full of judgment calls. It's a happy hunting ground for a prosecutor looking for decisions he can say were intended to mislead investors and might thus constitute criminal fraud. If an admiring press rewards him with a big headline, who's to know, given the recent history of provable fraud at Enron and Tyco? ...

Accountants' views on such matters may differ widely, but one or the other conclusion does not necessarily imply intent to defraud. Indeed, accounting is a profession well known among its insiders for its uncertainties and ambiguities. When the outside auditors of American companies sign off on a financial report, they don't claim infallibility. They say instead that their inspection conformed with generally accepted accounting principles, better known as GAAP.

I've lost respect for many a lawyer, law professor, and economist when they start talking and writing about accounting issues. And even those with accounting degrees, and even some Ph.D.'d accounting professors that have never practiced and are not licensed, often make thoroughly ridiculous statements. Corporate accounting isn't the set of cut-and-dried rules that so many believe, or pretend, it is; it can get murky and auditing murkier still.

Similar to GAAP is GAAS, Generally Accepted Auditing Standards. The standards are full of the underlying rule for almost every aspect of an audit: "auditor judgment". That's part of the standards and perhaps the most important aspect of an audit. GAAP is hardly any more concrete in its initial guidance.

There's ample room to criticize the state of the standards, but from what I've seen and heard in the news over the last few years, there's little reason to jump to the conclusion that the alleged corporate frauds and scandals have been a result of ignoring the standards.

The astute reader might have thought this: "The standards that corporate accountants and auditors are supposed to adhere to are only 'generally accepted' (it's in the name!)?" That's right. It's nothing more than an amalgam of relevant literature, some of which is more important than others, but theoretically infinite in size. The so-called "GAAP hierarchy" is generally said to have four levels, meriting vastly different degrees of deference. The problem is that the ones that get the most deference, such as Financial Accounting Standards Board (FASB) statements, are woefully unhelpful in accounting for the types of transactions that comprise many of the acts so often denominated as scandalous. And the lower end of the GAAP hierarchy amounts to anything in print (hence the very low deference), but is often where the "answers" to the questions of accounting for complex transactions come from. That's why disagreement, absent fraud, is common, even when it makes a huge monetary difference.

Spitzer, et al, are causing a lot of trouble and expense for a lot of people, including the shareholders, without even mentioning the real problem: there is no singular accepted or mandated "right" way to account for these transactions. It makes you wonder who's really trying to take advantage of the public, doesn't it?