Not Counting (Part 2)

So what turned accounting into the enemy?

Why is the Financial Accounting Standards Board the investor’s enemy? After all, all the accountants I know are decent people who care deeply about their work and love their families and pay their bills. So why has their profession cranked out rules upon rules that seem to defy common sense and leave the educated layman scratching his head?

In a word, interest.

The rulemaking body is dominated by the Big Four accounting firms. Based on the size of the firms audited, KPMG, Ernst & Young, Deloitte, and Pricewaterhouse evaluate 99% of the financial statements in the US. When a new issue comes up, of course these guys influence the body’s ruling. And for some reason, FAS always find a solution that is more complex.

This increased complexity has two effects. First, you can’t boil earnings down to a single number. Maybe you could once, but now the footnotes are just too important. Second, this increased nuance has functioned as a full-employment act for accountants. And an overreliance on financial rules can distort the system, as we’ve seen before.

When no one understands the numbers, the numbers just don’t count.

Douglas R. Tengdin, CFA
Chief Investment Officer
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