Category: Accounting


New Journal: Accounting, Economics, and Law

Scholars like me interested in law as it interacts with accounting and economics will be excited to learn of a new joural offering to link these three fields and many others. Called the Journal of Accounting, Economics and Law, this is a welcome new forum to celebrate study of the relation, too often under-appreciated, among these subjects. The journal’s founding editors are three scholars I’ve come to know and admire, Michigan law prof Reuven Avi-Yonah, Yale accounting prof Shyam Sunder and University of Paris business economics prof Yuri Biondi.  

I’m flattered to have  been asked to serve on the Advisory Board, which boasts many luminous scholars from around the world, including, from the US, Sudipta Basu (Temple, accounting); Jonathan Glover (Carnegie Mellon, accounting); David Kennedy (Harvard, law); my colleague Larry Mitchell (GW, law); Roberta Romano (Yale, law); Martin Shubik (Yale, economics); and Lynn Stout (UCLA, law).

Following is a description of the journal.   Manuscript submissions are encouraged!

“The Journal of Accounting, Economics, and Law aims to encourage a comprehensive understanding of the relationship between individuals, organizations, and institutions in economy and society.

Financial, economic and legal techniques and languages play an influential and neglected role in this relationship. Concerns of finance, control, accountability, responsibility, valuation, regulation, and governance will be raised in their connection with accounting, economics, law, sociology, anthropology, history, finance, political science, and the management and policy sciences.

The journal encourages works that seek to recombine disciplinary domains in response to practically relevant issues, while encouraging theoretical advances and insights, and comparative historical perspectives.”


Finance Theory and Accounting Policy

Amid the financial crisis, considerable debate attends the enduring validity of Modern Finance Theory, including assumptions of capital market efficiency, reliability of recognized risk measurement tools and models of risk reduction through diversification.  There’s little doubt that MFT has had considerable effects on positive law and legal scholarship in the past three generations.  Looming are questions about whether those policies warrant reconsideration given ongoing discoveries of potential deficiencies in those models.

Some of these implications appear in contexts covered by the broad subject called Law and Accounting, topics within securities regulation, corporation law and financial reporting policy. In writing a paper addressing the influence of MFT on L&A, I’m trying to identify the most significant subjects. In outlining a draft, I’ve identified the following as the most consequential, and would be delighted to hear, through comment or email, alternative suggestions or criticisms of this initial compilation.  Read More


Accounting 101 and the New Bank Tax

Christine Hurt and Erik Gerding have several good posts at Conglomerate on how the White House tomorrow will formally propose a tax on banks to recover losses government incurred providing capital infusions under the so-called Troubled Asset Relief Program (TARP).

It appears the tax would be computed based on a bank’s total liabilities other than its insured deposits, although some reports say the tax could be based on profits. Aside from recouping costs, the liability approach suggests creating an incentive for banks to avoid incurring liabilities deemed riskier than insured deposits, though without appearing to distinguish among risk types.

Aside from the inevitably contentious debate about the merits, fairness or efficiency of such a proposal, a particularly strange feature is how, according to a Wall Street Journal report, liabilities other than insured deposits would be calculated. The report says that liabilities would be calculated as “the difference between a firm’s assets and its combined equity and insured deposits.” Isn’t this a convoluted way of speaking?

Anyone vaguely familiar with business or accounting knows that owners’ equity equals total assets minus total liabilities. For five hundred years, bookkeepers have used this relationship to define the fundamental equation of accounting. Contemporary corporate law students describe equity as the residual claim on firm assets, reflecting that same subtraction of liabilities from assets.

Isn’t it confusing and backwards then to propose to measure liabilities as the difference between assets and equity (setting aside insured deposits)? Assets and liabilities are the normative categories forming the substantive content of accounting’s fundamental equation. Equity is only the difference between them.

So if you want to impose a tax on liabilities, there is no need to think of them as the difference between assets and equity. Apart from looking forward to hearing the President tomorrow defend the proposal’s merits and spell out its details, I’d like to know whether this reported feature appears and, if so, why it makes any sense.


Rep. Garrett Meddling with FASB

On Monday, I criticized political interference with US accounting standard setting and this morning I referenced innovative securitization deals that contributed to the credit crisis. Now I read that Rep. Scott Garrett (R-NJ) yesterday offered an amendment to the House financial reform bill to require the accounting standard setter to prepare a written study on the effects of its new accounting standards for securitizations!

The current financial crisis, plus the Enron calamity earlier this decade, made clear the vitality of having accounting standards, for securitization and similar financial transactions, that make a company’s debt obligations transparent to investors. The Financial Accounting Standards Board has done just that by issuing two new accounting standards governing such deals. As always, FASB did so after extensive study, deliberation, solicitation and evaluation of comment letters from anyone interested in providing them.

Garrett’s proposed amendment would now impose a legal obligation on FASB to do a more particular study, in cooperation with various federal regulatory agencies, on the effects of the new standards on companies who do securitization deals. This is objectionable for at least the following reasons: (1) it is inherently objectionable political intermeddling into the independent accounting standard setting process; (2) it is the result of lobbying campaigns by banks and others in the business of securitization; and (3) it caters to those lobbying interests rather than focusing on those for whom accounting standards are written: investors.

Rep. Garrett says he’s worried that making securitizations more transparent to investors would make it more difficult for banks and other financial institutions to do them. That would, in turn, mean reduced availability of consumer credit. It is as if the Representative has not read a single newspaper in the last two years. After all, it does not appear that the biggest problems in the country the past decade were consumers borrowing too little or banks doing too few opaque financing deals.


Against Politics and Finance in Accounting




An old joke says every financial crisis needs an accounting culprit to blame. The current crisis may be attributable instead to the dominance of modern finance theory and subordination of traditional accounting principles. Two generations of finance theorists—in business and law schools—developed elaborate models to measure and manage risk in a theoretical world of efficient markets where accounting is not relevant.

Yet two strange twists have arisen—one showing the intellectual limits of the finance story and the other the dark art of making accounting into a political issue. Both concern debate over how to measure financial assets on a balance sheet—the so-called fair value debate.

First, for decades, proponents of modern finance theory urged standard setters to direct asset measurements using fair value rather than applying traditional accounting conventions. The prescription was based on assertions that emphasized the reliability of efficient markets to reveal relevant values. Proponents said traditional accounting conventions, using acquisition cost adjusted over time, were comparatively impoverished.

Amid the crisis, those same people shift their stance, now saying fair value measures in stressful markets are either misleading or put downward pressure on values that could render owners of impaired assets, especially banks, insolvent. On its face, this is an admission about the limits of markets to reveal reliable asset values, that modern finance theory is impoverished.

Second, without opining on the merits of measuring assets at fair value or using historical cost accounting conventions, this issue, once again, is turning accounting standard setting into a political expression rather than a professional one. Politicians in Congress, under heavy bank lobbying, pressured the US standard setter [the Financial Accounting Standards Board] to adopt bank-friendly approaches to asset measurement.   Now, Congressional bills  (here, for example, and noted here) contemplate empowering politicians and/or a new federal agency to oversee US accounting standard setting, equipping them with veto rights over any accounting standards the political power consensus disfavors.

Read More


PCAOB’s Constitutionality

The Sarbanes-Oxley Act of 2002 created the Public Company Accounting Oversight Board to set standards and supervise the public auditing profession.   A pending Supreme Court case will consider whether the result is constitutional under the Appointments Clause and separation of powers principles.   The DC Circuit thought it was good enough, seeing the Board as a subsidiary of the Securities and Exchange Commission. 

Thanks to Donna Nagy, a diverse group of law professors (including me)  join an amicus brief challenging that stance.    We emphasize that we believe that the idea of the Board is appealing but the design Congress chose is flawed.   A copy of the brief is available here.


New Accounting Book Coming

accounting-bookEarlier this summer, teachers using my accounting textbook received an update highlighting developments for use in Fall classes. Changes will appear in the forthcoming fifth edition, due out in time for Spring classes.

I’ve completed and submitted the manuscript and am now finishing revisions to the Teacher’s Manual and PowerPoint slides. The wonderful publicity department at West, my publisher, will release some version of the following squib on the book:

Cunningham’s Introductory Accounting, Finance and Auditing, adopted at some 70 schools in its 12-year history, presents accounting, finance and auditing using clear narrative with extensive illustrations. It balances accessibility with rigor.

Pedagogical features that make it easy to use include a coherent layout, complete set of PowerPoint slides, comprehensive Problems and Solutions, intriguing Conceptual Questions and International Comparisons plus a Glossary, Bibliography, Index and Teacher’s Manual.

The fifth edition adds material on international accounting and other hot topics. It can be used as the primary book for a one-, two- or three-credit accounting course or to supplement business associations, corporations or corporate finance courses.

Fleshing that out a bit, changes from the fourth to fifth edition are far less extensive than changes made from the third to the fourth edition in 2005. No major overhaul is undertaken and no new chapters are added.

But I have made several pedagogical improvements, added materials on international financial reporting standards (IFRS), and updated a few discrete accounting and auditing topics. The main results are as follows. Read More


Copyright to Private Standards Government Embraces

golden-copyrightUnder what circumstances do privately-generated standards lose copyright protection by virtue of governmental approval, mandate or adoption of them? The law on this subject remains unsettled, with a few somewhat conflicting federal circuit court decisions and no Supreme Court direction. The issue is when standards become functional law so that, under principles of justice dating to Roman times, they must be freely accessible to the public.

Interest heats up after a firm based in California asks people to scan works that have been referenced in the Code of Federal Regulations for inclusion in the firm’s free standards database. This is a bold move for the firm to undertake and a potentially risky one for those responding to its request.   My 2005 Michigan Law Review piece offered a framework for resolving these problems; the following abstracts it a bit and applies it to the California firm’s request. Read More


Treatment Differences in US / International Accounting

global and local accounting.jpgAmid continuing enthusiasm for the US to abandon its traditional accounting standards in favor of those set by an international body in London, insufficient attention is paid to differences in how the two treat particular questions and what those different treatments reflect about political realities.

In late August 2008 on this blog, I asked whether readers were aware of lists or charts illustrating treatment differences between US and international accounting standards. Comments and other research yielded modest results. The relevant literature tends to focus on differences in bottom lines between the two systems, not treatment differences.

This gap led Bill Bratton (Georgetown) and I to believe that a list or chart of treatment differences, with contextual analysis, would be useful to the literature (in both accounting and in law). As a result, Prof. Bratton and I prepared a contribution for the Virginia Law Review, commenting on a related paper by Jim Cox (Duke).

Our piece is now available here. The chart of treatment differences appears as the Appendix, at pp. 17-26. The preceding pages synthesize how these differences reflect deeply divergent philosophical and political realities, despite widespread talk of how the two standards are convergent.

The paper’s abstract reads as follows:

Read More