Monday, October 11, 2010

The Subtle Change from Principles to Rules (Part I)

10/11/2010 Portland, Oregon - Pop in your mints, its time for something fresh.  From time to time my occupation affords me the opportunity to listen to experts ramble on and on about rules and numbers.  What little of value that I usually take from these opportunities generally comes in the form of free breakfast or lunch, depending upon the time of day.  Through the searing boredom, from time to time I find a nugget, that is, an insight worth the seemingly wasted precious moments on this earth.  One autumn day four years ago, I got one.  Enjoy!

The Subtle Change from Principles to Rules (Part I):

I recently attended a brief seminar which was titled “GAAP Update.”  This title, to anyone who is not an accountant, makes it sound like some sort of fashion show.  While I had hoped to observe some of the latest models of pocket protectors, the only thing that any reasonable person (that is you and I, dear reader) could observe to be “in fashion” was decreasing reliance on professional judgment and increasing scrutiny, oversight, and more rules.  In order to understand this observation, we must first understand GAAP.  GAAP, while not addictive, should be taken in small doses.  As such, I will administer it in small doses so that we can avoid the common side effects of confusion, drowsiness, and its other less understood attacks upon the human psyche.

GAAP, for those of you who have been fortunate enough to avoid the acronym thus far, stands for “Generally Accepted Accounting Principles.”  According to wikipedia, “GAAP is the standard framework of guidelines for financial accounting. It includes the standards, conventions, and rules accountants follow in recording and summarizing transactions, and in the preparation of financial statements.”  Wikipedia goes on to list the principles by which GAAP is guided by as the principles of sincerity, permanence of methods, non-compensation, prudence, continuity, and periodicity.  We will return to these principles in future tips as they are important for anyone trying to understand the methods and madness of the world of accounting.

The presenter at the seminar, a brilliant local CPA, alluded to what I am calling the “subtle change from principles to rules” when he mentioned that the word “should” in of some of the pronouncements had been changed to “must.”  On the surface, this sounds like a simple grammatical correction, as if a language expert had been asked to make the writings of accountants more accessible to the general public.  The deeper truth, the one that our brilliant local CPA alluded to, is that trust in professional judgment has disintegrated and the need for specific, carefully worded instructions that remove the need for “flawed” professional judgment, is taking its place.  This should alarm us all as the accounting field is by no means the only field that this subtle change is taking place in.

Any institution that is organized by human beings, such as a company, a religion, a government, or a soccer team, follows a pattern.  Observe closely, dear reader, and see if you can pull an example from your own experience.  These institutions begin with some sort of principle or set of principles.  The person or persons who begin the institution understand the principles upon which they were founded and operate according to these principles.  When something is in its genesis, it is fresh and exciting.  Its possibilities bound about, like deer in a meadow in early spring.  It is a thing to behold.  People flock to this bounding, this life, to simply breath it in, to somehow be a part of it.  “Let it always be this way,” they say “I love this!  How do I join?”

So join they do, in great multitudes.  Everyone wants to bound with the deer, drink from the stream, to lie in the grass.  BUT WHAT HAPPENS?  The new people, those that were not there for the genesis, do not understand why the deer are bounding.  And when the deer try to explain this to them, the new people may not understand or perhaps disagree with the why.  But they do agree that the bounding must continue, and increase, by all means.  So they continue to flock to the meadow.  BUT THEN WHAT HAPPENS? Soon, because of the crowds, the bounding area becomes a mosh pit, the water in the stream becomes undrinkable, and the grass turns to mud.

SO THEN WHAT HAPPENS?  In Part II, we will look at what happens once the meadow turns into the aftermath of Woodstock…

Oh Deer,

David Mint