By Dave DeWitte
Accounting historian Stephen Zeff says many of us don’t understand the implications of political influence on accounting standards, but we all live with the consequences.
The information that we rely on as investors in publicly traded companies is an obvious example, according to the Rice University professor, who will speak at 6 pm. Oct. 23 in Room C-20 of the UI’s Pomerantz Career Center as part of the McGladrey Institute National Speaker Series.
Currently, debate reigns over whether airlines in the United States should be required to account for the financing of their aircraft fleets on the books or allowed to keep them off the books because virtually all of their aircraft are leased. A change in the rules for accounting for leased assets would drastically alter the financial profile of some airlines by adding mounds of debt, Mr. Zeff said.
Such debates have gone on throughout accounting history, according to Mr. Zeff, who will share some dramatic examples of how accounting rules shaped national consumer attitudes – and more.
The classic example is a recurring standards debate that began under President John F. Kennedy in the 1960s, Mr. Zeff said. The United States economy was in the doldrums, and the president supported legislation to stimulate the economy by allowing companies that invested in machinery to receive a 10 percent tax credit.
The tax credit was well received by Congress and industry, but questions were raised over how it should be reflected on a company’s books. Corporations wanted to take it as income immediately, rather than depreciating the tax credit over its useful life. The public would see them as more profitable in the near-term, and that would have made the nation’s leadership look good.
The standards-setting body thought it should be depreciated, following the logic that corporations don’t make money by buying things, but rather by making and selling things. Congress eventually got the Treasury Department to force the standards-setter from adopting the depreciation approach, Mr. Zeff said.
“The last time it was actually placed in legislation, which kept the standards-setter from doing anything,” said Mr. Zeff. “It really focused an attention on accounting like you’d never had before in the United States.”
Today, the pressure on the Financial Accounting Standards Board, the International Accounting Standards Board and other standard-setting bodies remains intense because of the increasingly taut connection between CEO pay and the financial results of corporations. The investment community likes the results from publicly traded companies to be smooth and predictable, and CEOs, whose compensation and career prospects often reflects stock prices, want accounting rules that will help them avoid volatile swings in profits and revenues.
Lobbying for accounting rule changes typically is done through industry trade associations rather than by individual corporations, Mr. Zeff explained. Corporations provide campaign contributions, however.
“Congress doesn’t know anything about accounting, but they certainly know when an important company in their state wants a certain rule changed,” he noted.
As an accounting historian, Mr. Zeff is a kind of white rhino in the herd of accounting academics. He says accounting history is almost never taught in business schools, but is valuable because history tends to repeat itself.
Individual investors and consumers should also care about the history of politics and accounting standards, according to Mr. Zeff, who has written more than 25 books and more than 150 published articles on the topic, and received numerous awards and honorary doctorates in the United States and Europe.
“They should care about it because investment decisions are made on the basis of credible financial information, and if self-interested lobbyists cause standard-setters to develop biased standards, the resulting information may not be credible, and markets may not move capital in the right direction,” Mr. Zeff said.
By directing capital flows into inefficient directions, Mr. Zeff said, non-credible financial information can impair the performance of the entire economy.
Admission to the lecture is free.